Morning Market Mood: The Fed’s Big Decision Under the Spotlight
Yesterday’s trading felt like a quiet pond – hardly any spill over. Today, though, the entire world is glued to the FOMC announcement. Markets are holding their breath, wondering whether the Fed will give a 25‑basis‑point (bp) or a 50‑bp lift.
Why the Size of the Cut Is Dull
The real drama isn’t how big the cut is, but how fast rates will slide back to neutral. Think of it as a race from peak to calm: a quick drop means the market feels the lift sooner. A slow slide keeps everyone on their toes a while longer.
Where We Stand (and what’s happening)
All eyes are on the 7 pm London / 2 pm New York window. Sleep? Who cares. All the news we had yesterday is now emoji‑level compared to Chair Powell’s big showdown.
- Stocks went flat: any early gains vanished fast, even as Treasuries traded softer across the curve.
- US retail sales +0.1% MoM for the fifth straight August – good, but not a “big‑cut” trigger.
- US industrial output +0.8% last month – solid, yet still shy of a 50‑bp scare.
- Canadian CPI dipped to 2.0% YoY in August, the lowest since Feb 2021. That’s making folks whisper about a 50‑bp BoC cut next month.
- Germany’s ZEW survey plummeted to 3.6, the lowest since Oct 2023. Eurozone vibes? Pretty bleak.
Today’s Big Question: Cut or Not? (And How Much?)
Everyone’s ready to call a 25‑bp cut, but the market’s got a split personality: the sell‑side loves 25‑bp, the USD OIS curve is split 45%/55% with 50‑bp, and futures lean 60% to a larger cut.
My own prediction (just my own guess) looks like this:
- 25‑bp cut, unanimous vote.
- Statement saying risks on both sides of the dual mandate are balanced.
- Hints at at least 75‑bp total cuts this year, another 100‑bp in 2025.
- Focal press conference where Powell says no more job‑market softening, but keeps the door open to a 50‑bp cut later.
It’s a bit dicey – if the Fed goes larger, markets might panic, seeing the Fed’s “secret” moves that the rest of us miss.
What Happens Next? The Market’s Reaction Dance
Logic says a 25‑bp drop pulls risk down; a 50‑bp jump might rally ultra‑short‑term risk. But if the Fed takes a bigger swing, the backlash could be sharp, only to reverse quick during the press release.
Once the dust settles, I don’t see a clear reason to think equities will tumble. My bull story still stands: earnings growth, robust economic activity, and a “Fed put” protecting us.
The Fed put isn’t about the size of the cut, but how fast the rest of the policy notch (roughly 200 bp) gets shaved off and rates hit neutral again. If the Fed chooses a rapid, aggressive path, the greenback might suffer, but investor sentiment could spike toward year‑end. If it’s slow and steady, markets stay calm, but the outlook stays muted.
Where to Look From Here
If I had to keep my eye on future cuts – how fast, how big, how neutral the rates get – I’d say: watch the Fed’s messaging, the signal in futures, and when the policy band finally loosens.
Hold tight, buckle up, and let’s see where this Fed roller coaster takes us.
