Financial markets experience an uptick in response to expectations of a potential Federal Reserve interest rate reduction, following the release of discouraging employment statistics.
The chances of a September rate cut by the Federal Reserve are currently very high, with market expectations ranging from about 75% to over 90% probability according to recent data.
The Federal Reserve's signals towards a potential rate cut are becoming increasingly clear. The July FOMC meeting saw two dissenting votes in favour of cutting rates by 0.25 percentage points, signalling some internal Fed inclination towards easing. The Fed’s language also shifted from "solid pace" growth to "growth of economic activity moderated," indicating slowing GDP growth.
Market expectations, as measured by the CME FedWatch tool, show probabilities for a 25 basis point cut around 40-45% as of late July, but these numbers have risen sharply after a weak July jobs report. The current probability stands at 90.4%, with very few investors expecting no cut. Some sources note the probability is slightly below 95% due to concerns about inflation still being above target.
Deutsche Bank and Goldman Sachs economists expect three steady 25-point cuts beginning in September, although a faster pace (e.g., a 50-point cut) is possible if upcoming labor data deteriorates further.
The weak July jobs report boosted market bets on a rate cut, pushing probabilities from around 63% to over 90% within a week. The softness in the labor market often pressures the Fed toward easing.
However, some cautious voices note a delay is possible if inflation or employment data surprises to the upside.
In other news, the STOXX 600 in Europe rose 0.4% in early trading, marking the second day of increases. Trump's announcement about filling a governorship position at the Fed has added to concerns about the politicization of interest rate policy. The soft U.S. nonfarm payrolls data released on Friday increased the odds for a September rate cut by the Fed to about 94%.
Global stocks rose for a second consecutive day on Tuesday, with tech heavyweights Nvidia, Alphabet, Meta, and Palantir Technologies seeing gains overnight. Palantir raised its revenue forecast for the second time this year. Data releases later on Tuesday include final readings of business activity for July for the euro zone, Britain, and the United States.
The U.S. dollar steadied due to increased expectations of action from the Federal Reserve. Oil prices edged lower due to output increases by OPEC+. Data from Japan and China showed resilience in their service sectors, with Japan's S&P Global final services purchasing managers' index (PMI) at its strongest since February, and China's services activity expanding at its fastest pace in over a year. MSCI's broadest index of Asia-Pacific shares outside Japan climbed 0.8%.
The second-quarter U.S. earnings season is winding down, with reports this week expected from companies including Walt Disney and Caterpillar. U.S. shares rallied on Monday based on positive earnings reports and increased bets for a September rate cut from the Fed. Bitcoin fell 0.6% and gold rose 0.1% in value.
Jefferies strategist Mohit Kumar stated that the impact of bad economic data depends on how bad it is and what's already priced in. Oil prices dropped for a fourth day, leaving Brent crude futures near two-week lows, due to mounting concerns about the fragility of the underlying economy and potential for oversupply.
Trump has threatened to raise tariffs on goods from India due to its Russian oil purchases, which India has called "unjustified" and vowed to protect its economic interests. The threat of secondary sanctions on India's financing of Russia may be a means to increase U.S. leverage on India to open up its domestic economy or commit to buying U.S. energy.
In conclusion, the market consensus strongly favours a September rate cut, most likely 25 basis points, with probabilities around 90%. However, some cautious voices note a delay is possible if inflation or employment data surprises to the upside.
Businesses and investors alike are closely watching the stock-market for signs of a potential rate cut by the Federal Reserve, with trading heavily suggestive of a September reduction. The currently high market expectations for a rate cut, ranging from 75% to over 90%, have been bolstered by the Fed's shifting language and internal dissent, indicating a clear movement towards easing.
