Today's markets: Fed’s mega cut sends shares soaring

It’s been quite the rollercoaster since yesterday’s mildly surprising Federal Reserve rate decision, with shares rallying, then rallying and then rallying again this morning.

The S&P 500 made a record high after the announcement but finished yesterday lower for the session after the press conference with Fed chairman Jerome Powell. Futures have turned higher though with a rebound overnight in Asia. This morning Europe has started on a very bright note, ahead of the Bank of England’s rate decision, with the FTSE 100 up 0.9 per cent. On the mainland, shares in Frankfurt and Paris are up even higher, rising 1.2 per cent and 1.7 per cent respectively. Ocado’s surprising update makes it one of the largest risers across the continent this morning.

After the Fed’s mammoth 50 basis point cut, the yen surged and then dumped as the dollar index fell below 100 for the first time since July 2023 before rebounding. Bond yields and gold whipsawed and ended flat...the market took what it wanted from the Fed’s first rate cut in four years and made up its mind about what will come amid the mumbo jumbo and jumbo cut.

Closer to home, the Bank of England is likely to leave rates unchanged today and governor Andrew Bailey could push back against the market betting on a faster pace of cuts. Sterling trades a little firmer this morning with GBPUSD north of 1.3250 having briefly surged to a fresh two-and-a-half-year high last night on the initial sell-the-dollar kneejerk to the 50bps move.

In the US, it was the jumbo cut the market had been looking for. The Fed appears to be leaning more on the jobs side of the dual mandate...opens with a big move and implies another 50bps this year...it suggests concern that they are seeing signs the unemployment rate could accelerate higher in the coming months...the implied rate for December dropped by 15bps. 

And yet...the dot plot showed just another 50bps of cuts this year. The market initially felt 50bps today means the Fed is locked into doing 50bps again and again as the jobs market deteriorates. Powell said: “I do not think that anyone should look at this and say, ‘Oh, this is the new pace.’” The risk reverse ferret indicates the market listened to what Powell had to say, as well as the dots.  

Powell managed to say that the reason for a big cut was to lock in the gains rather than it being a sign of things to come. “The US economy is in a good place and our decision today is designed to keep it there… We do not think we are behind [in cutting rates], but you can take this as a sign of our commitment to not get behind,” he said. 

The Summary of Economic Projections (SEP) contained some changes from June. Inflation expectations trimmed to 2.3 per cent from 2.6 per cent in June, and down to 2.1 per cent vs 2.3 per cent in 2025. Unemployment revised up to 4.4 per cent from 4.0 per cent this year and up to 4.4 per cent from 4.2 per cent in 2025. And most interesting of all the Fed funds rate next year is seen at 3.4 per cent, down from 4.1 per cent forecast in June, with the long-run rate seen at 2.9 per cent, down from 3.1 per cent from June.

By Neil Wilson, chief market analyst at Finalto