Fed: Back to Hawkish Cuts
Last Wednesday Federal Reserve officials delivered their second interest rate cut to support a softening labor market – Fed Fund rate was lowered by 25bp to 3.75%-4%
- The Fed also announced it would stop shrinking its portfolio of assets starting from December 1st ending a process that began in 2022 – since then the Fed has shed over 2 trillion USD in Treasuries and MBS bringing the balance sheet below 6.6 trillion USD
- Fed Chair Jerome Powell delivered a hawkish blow in the post-meeting press conference announcing that a further reduction in rates during the December meeting is not a foregone conclusion
- Treasury yields and the dollar jumped after these comments, with interest rate swaps showing now a 65% chance of a cut in December, before the meeting a further reduction was entirely priced in
ECB: Inflation and Growth in Check
The European Central Bank left interest rates unchanged for third meeting in a row as inflation continues to be in check and the economy continuing to grow
- As expected the deposit rate was kept at 2.00% with no guidance given concerning any future moves – data dependency continues to remain in focus
- Officials have recently signaled that there is little reason to further reduce borrowing costs as inflation has been around 2% target for months and there have been strong indications that the impact from tariffs has been contained for now
- This was confirmed by GDP data released last Thursday which showed the 20-nation bloc growing above expectations in the third quarter (+1.3% year-on-year vs. 1.2% expected) – France was the main driver whilst Germany and Italy stagnated but avoided recession
CEOs Flag High Market Valuations
Wall Street CEOs said investors should brace for an equity market drop of more than 10% in the next 12 to 24 months, and that such a correction may be a positive development
- Corporate earnings are strong but valuations are challenging, with most people saying stocks are between fair and fully valued
- Drawdowns of 10%/15% are seen as a normal feature of cycles and a healthy development, with some executives advising clients to stay invested and avoid trying to time the market
Source: Bloomberg
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