What matters in U.S. and global markets today |
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With a first interest rate cut of 2025 now considered to be in the bag, world markets are hungry for signals on how much more comes after. This has allowed the dollar to stabilize at four-year lows against the euro ahead of today's decision.
U.S. stocks also stalled on Tuesday and futures were flat ahead of today's bell, with Fed rate cut bets now gravitating to exactly 25 basis points after news of roaring 5% annual retail sales growth in August helped put the kibosh on thoughts of a bigger move this week. Gold backed off too. That didn't stop U.S. long bonds rallying further, however. Helped by brisk demand for 20-year debt at Tuesday's auction, the 30-year yield hit a 4-1/2 month low of 4.62% ahead of the Fed announcement.
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Hong Kong shares closed at their highest level in four years, as the expected Fed cut, weakening dollar and buoyant local technology stocks all helped. Amid signs of returning foreign funds, confidence in China's artificial intelligence capabilities is rising and U.S. President Donald Trump's announcement of a deal to keep TikTok operating in America lifted appetite for risk assets. The U.S. and Chinese presidents are due to speak on Friday. By contrast, Nvidia slipped on Tuesday and continued to fall another 1% overnight on reports of weak China demand for a new AI chip and after the Financial Times reported that China's main regulator told the country's big tech firms to stop buying all of Nvidia's AI chips.
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The euro surged to a four‑year high against a weakening dollar on Tuesday, but the greenback stabilized somewhat today and the dollar index bounced slightly from two-month lows. However, China's offshore yuan continues to boom to its strongest level of the year - and the best since the U.S. election. Japan's yen was at its strongest in a month ahead of Friday's Bank of Japan decision and the Canadian dollar steadied ahead of Wednesday's expected quarter point rate cut by the Bank of Canada. Soft Canadian August inflation data on Tuesday underscored BOC easing bets. The Aussie dollar fell back from Tuesday's one-year high.
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With Trump visiting Britain and the Bank of England's policy decision tomorrow, sterling hovered close to two-month highs against the ailing dollar and UK stocks and gilt prices were firmer. As part of the state visit, Britain and the United States agreed a technology pact to boost ties in AI, quantum computing and civil nuclear energy - and top U.S. firms led by Microsoft pledged 31 billion pounds ($42 billion) in UK investments. BoE easing bets for the rest of this year are off as UK inflation in August held at 3.8% as expected - the highest inflation among major advanced economies.
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President Donald Trump on Tuesday announced an agreement between the U.S. and China to keep TikTok operating in the United States, with three sources familiar with the matter saying the deal was similar to one discussed earlier this year.
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Britain and the United States have agreed a technology pact to boost ties in AI, quantum computing and civil nuclear energy. The "Tech Prosperity Deal" is part of U.S. President Donald Trump's second state visit to Britain, which formally begins on Wednesday.
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President Donald Trump's renewed push to nix quarterly corporate disclosures, a drive that went nowhere in his first administration, has a better chance this time as the White House takes more control of the Securities and Exchange Commission's agenda.
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The Trump administration has made it clear that they think Chair Jay Powell’s team has done a poor job with inflation control. Eurizon SLJ asset management CEO Stephen Jen argues that the president may have a point.
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The rush to hedge U.S. equity exposure this year was initially seen as part of a broad 'de-dollarization' process. But, writes ROI markets columnist Jamie McGeever, as the months go by and U.S. stocks roar to fresh tech-fueled highs, this theory seems to be crumbling.
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Fed may trip the stimulation wire |
The Federal Reserve may be about to stimulate an economy growing at more than 3%, where stocks are at record highs and inflation remains above target. The problem is that no one knows for sure how far the U.S. central bank can go before it trips that wire.
Putting aside the intense political pressure, the fundamental arguments for Chair Jerome Powell to resume Fed rate cuts this week rest on the softening U.S. jobs market and ongoing problems with housing affordability, as well as concerns that the economy could head south by this time next year.
The extent of the jobs trouble is debatable, however, due to a halt to immigration and the 'weakness' may have as much to do with labor supply as demand. The housing market also remains slightly distorted because the extraordinary drop in mortgage rates during the COVID-19 pandemic is making homeowners loath to sell.
On the flipside, U.S. retail sales are still booming at an annual rate of 5%, the stock market has roared to record highs, broad financial conditions are the loosest in three years and inflation continues to run hot above target - whatever one assumes the enduring impact of trade tariffs.
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Graphics are produced by Reuters. |
Given this mixed bag, the Fed's best course of action may be to shift to neutral - a rate that neither spurs nor inhibits the economy. But, as ever, determining precisely where that holy grail may be is a complex and wonky task.
By some measures, a quarter-point cut this week would already push the Fed close to or even below neutral territory. A 50-basis-points (bps) move today, or the second 25-bps move in October that is currently 80% priced into markets, could already move the Fed into stimulative mode, raising questions about whether White House demands are already trumping traditional Fed assessments. If only it were that simple. SPECIAL GUEST STAR A long-standing Fed model for determining the notoriously elusive neutral real rate - the Laubach-Williams gauge jointly developed by New York Fed boss John Williams - estimates this figure, dubbed 'R-star', is currently 1.37%. |
If the midpoint of the Fed target range were to fall 25 bps to 4.125% later today, then the prevailing real funds rate based on the most recent core PCE annual inflation rate from July would fall to 1.225% - so mildly prodding but not super stimulative. |
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