Rates recalibration
César Pérez Ruiz, Chief Investment Officer, Pictet Wealth Management.
The Fed’s decision to “go big” and lower the Fed funds rate by 50 bps provided a fillip to equity markets last week. The large rate cut, on top of upbeat US economic data on manufacturing and retail sales, were seen as boosting the case of a “soft landing”, helping the S&P 500i to a 1.4% gain for the week (in USD) and a new record high. Unsurprising, equities in cyclical sectors were the big winners, as were small caps (the Russell 2000ii gained 2.1% on the week (in USD)) while defensives lagged. The Stoxx Euro 600 retreated amid worries over the auto sector and a pullback in UK stocks, but US dollar weakness helped the MSCI EMiii index to a 2.3% gain (in USD). The Treasury yield curve steepened, with two-year yields flat on the week while 10-year yields rose. The US dollar declined against sterling last week and, to a lesser extent, the euro, but made gains against the yen after the Bank of Japan made it clear it was not in a hurry to raise rates again. Oil prices received a boost from the US rate cut and declining crude stockpiles, while gold continued to make little headway on the week.
Powell wants to be more pre-emptive in securing a soft landing and his tolerance for further labour market softness seems quite low. With the fed funds rate still well above the FOMC’s neutral estimate, we now expect another 50bps rate cut in November and a 25bps cut in December.
While the market has focused on the Fed, negative earnings revisions pose a potential risk. This was shown in weak results from a US logistics provider and a profit warning from a European automaker. We see limited upside for equities and favour moving from cash to fixed income. A key question now is whether declining rates will stimulate economic growth, which is a crucial driver for earnings. PMI data this week will be important.
With Middle East tensions rising, we believe the risk of all-out war between Hezbollah and Israel will either materialise in the coming weeks or recede. We are watching Iran’s next move closely and are overweight gold.
In markets, our 2024 themes of M&A and buybacks were reinforced by a tech giant’s buyback plan and reports of two chipmakers discussing a merger.
