News Recap • Week 38 2024

We had another busy week of central bank meetings with the US, the UK, Japan, and China reviewing their interest rate policies. They delivered a good mix of surprises and non-events.

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The Fed cuts interest rates by 0.5%

Let’s not bury the lead: The Fed’s jumbo-sized rate cut was undoubtedly the main event of the week. This was the Fed’s first rate cut since pre-COVID and the first change in over a year where rates have been steady at 5.25% to 5.5%. Not only because of the size of the cut itself but the uncertainty leading into it.

Looking at the past several Fed meetings, we’ve all but known in advance what the new rate would be. And while there was no doubt that the Fed would cut, it wasn’t at all clear by how much. Consensus among economists and market participants had long been for a standard 0.25% reduction but the odds swung in favor of 0.5% a few days in advance of the meeting. It had also fluctuated significantly in the weeks prior with every new economic data point.

Some pundits worried that a 50 bps cut would indicate a much weaker economy—or at least send that signal to the market, rightly or not. It could be interpreted as an admission by the Fed that they’re (once again) behind the eightball and are trying to fix an economy that has already been broken by their aggressive hikes and high interest rate level. Furthermore, cutting rates too aggressively could stoke inflation before it’s been fully tamed.

Others said the Fed should cut by 50 bps exactly because the economy has slowed so much and because the fight against inflation has been won. They worried more about a slowing job market and lower economic growth. Some even pleaded for a 0.75% or even a full 1% cut to kick us off.

In the end, the Fed decided to go with a 50 bps cut. At the same time, Fed Chairman Jerome Powell did his best to quell the concerns mentioned above. He emphasized that they’re not cutting because they see a recession coming. Rather, they simply see the risks posed by inflation and by a weakening labor market as equally balanced. This caused them to kickstart the rate-cutting cycle with a larger cut.

Lower interest rates are generally seen as positive for the equity market. And the US markets did indeed rally on the news. At least temporarily. As Jerome Powell’s speech progressed, markets sold off and actually ended the day slightly down.

It seemed like the markets just needed some time to digest everything though. On Thursday, the day after, risk assets around the world rallied. The Nasdaq Composite jumped 2.5% for one of its best days this year. Both the S&P 500 and Dow Jones closed at record highs on Thursday. Bitcoin got a 6% boost in the 24 hours following the rate cut.

It will be interesting to see if markets follow through in the upcoming week or swing back to a more pessimistic interpretation of the Fed’s move.

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The UK, Japan, and China leave rates unchanged

The Bank of England held rates steady at 5% after cutting by 0.25% in August. This was well-telegraphed and in line with expectations.

The Bank of Japan also held rates unchanged, as expected. What’s interesting about Japan is that they only recently began a rate hiking cycle, moving in the opposite direction of both the US, UK, and EU. They went to positive interest rates in March for the first time since 2010 when they hiked from -0.1 to 0.1%. They followed up with another 15 bps hike to around 0.25% in July. For now, that’s where rates will stay.

The People’s Bank of China arguably delivered an even bigger surprise than the Fed when they decided to leave rates unchanged this week. They kept their one-year loan prime rate (LPR) at 3.35% and the five-year at 3.85%. Economists had widely expected a cut to further stimulate the slowing economy. Investors didn’t seem too bothered though, as the Hang Seng Index rallied 1.4% on Friday after the announcement and more than 5% for the week.

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In other news

• US retail sales rose 0.1% in August, significantly outpacing economists’ gloomy forecast for a 0.2% decline. Excluding autos, however, the number also came in at 0.1% which missed forecasts for a 0.2% gain.
• August home sales dropped more than expected in August as sales were 4.2% lower than the same month last year. Meanwhile, the median price was $416,700, up by 3.1% from last year. There were 1.35 million units for sale at the end of August, up 22.7% year over year. That’s still only a 4.2-month supply though, while a 6-month supply is considered well balanced between buyers and sellers.
• The UK’s national debt is now the same size as the region’s total GDP. The debt-to-GPD ratio jumped from 80% to almost 100% when COVID hit but was then slowly trending down until the start of this year. This comes at the same time as UK consumer confidence plummeted in September on the back of dire warnings from PM Keir Starmer’s Labour party. Brits should prepare for some unpopular economic policy changes, including tax hikes.
• UK inflation came in line with expectations for August at 2.2%. This was also unchanged from the month of July and slightly higher than the 2% rate in May and June.
• UK retail sales rose 1% in August, significantly outpacing the forecasted 0.4%.
• UK housing prices increased by 0.8% in September, twice the expected rate.
• India just flipped China in the MSCI World All-Country World Index. India’s weighting is now 2.35% vs China’s 2.24%. This comes on the back of India’s Nifty 50 index rising 17% this year while the Shanghai Composite is down by 8%.
• Nike replaced CEO John Donahoe with Elliot Hill. Donahoe has been at the helm since January 2020 where his eCommerce expertise came in handy as the pandemic hit. Nike jumped 6% on the news Friday.
• FedEx earnings came in lower than expected, sending the shares down by 15% on Friday. This fully erased their 15% earnings pump from three months ago. FedEx is often viewed as a barometer for consumer health, although many analysts attribute the disappointing earnings to consumer trends and FedEx itself rather than the state of the economy.
• Microsoft and BlackRock are teaming up on a massive AI infrastructure investment. The companies will seek $30 billion of private equity capital over time for the strategy along with the UAE’s MGX investment vehicle. They plan on leveraging this amount to as much as $100 billion in potential investments.