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At the end of last week, market expectations unexpectedly changed: investors now expect the Fed to cut the Fed Funds rate by 50 basis points instead of the usual 25, which triggered demand for risky assets.
To be more precise, the S&P 500 finished the week growing 3.4%, the Nasdaq more than 5%, and gold reached a new all-time high of $2,586, whereas the DXY index fell to 100 level.
Although it would seem that the regulator’s more drastic move is, on the contrary, bad news, as it means that the economy is slipping into recession and things will only get worse from here.
In answering the question of what caused such expectations, it was not optimistic data but a series of articles in the Financial Times and Wall Street Journal discussing the Fed’s expectations.
So, will Powell and the Fed surprise us this week?
There are only many solid fundamental reasons for a more aggressive policy shift. The labor market remains stable, and the overall economy shows no signs of recession, so there is no need to rush.
In addition, underlying inflation was higher than expected at 0.3% month-over-month (July: 0.2%), against a forecast of 0.2%, suggesting the FOMC members will opt for a more cautious approach.
As for the Bank of Japan, no changes are anticipated despite the country’s consumer inflation rate continuing to rise for the fourth consecutive month in August, with core CPI up 2.8% year-over-year.
The main concern remains financial stability. However, 87% of the 53 economists surveyed expect a rate hike before the end of January, with December being the most likely month.
The Bank of England is also expected to keep interest rates unchanged. But if this week’s inflation data is weaker than expected, a rate cut could be brought forward to November.
