The Fed finally delivers a rate cut

The Federal Reserve’s (Fed) September meeting brought with it some lively market activity. The Fed announced a larger than expected interest rate cut of 0.5%, compensating for not acting in July. Stocks initially jumped after the announcement of a rate cut, only to finish the day in the red. The Fed emphasised that while inflation is approaching the target of 2%, it remains uncomfortably high, but softer labour market data played a crucial role in the rate cut decision.  

Focus on upcoming jobs data 

Jay Powell, Chair of the Fed, did not provide clear guidance on future rate decisions. He noted that the committee will remain data-dependent, with upcoming labour market readings crucial for the next steps. If job numbers continue to weaken, we could see more significant rate cuts. On the flip side, if growth stabilises, we might see a return to a gradual path towards neutral interest rates.  

While the initial market reaction was mixed, markets rallied afterwards, pushing US stocks to a new all-time high. While there is much debate on what the first rate cut may mean for markets, history shows that the growth backdrop is extremely important. In cases of a cutting cycle outside of a recession, markets are typically positive in the following year. Therefore, if the US avoids a recession in the current cutting cycle, history suggests remaining invested to avoid missing out on improved performance.  

China unleashes massive stimulus package  

Chinese equities had their best day in 16 years, as Beijing launched its biggest stimulus plan since the pandemic. The announcement follows a slew of data in the quarter pointing to an anaemic growth environment in China, with little optimism of a turnaround. 

The Chinese government’s urgency for a stimulus package stems from its determination to achieve a 5% GDP growth target for the year and marks a significant change in stance to support its faltering economy. China’s central bank lowered interest rates and injected liquidity, while also announcing government funding to boost the stock market and the property sector. Further fiscal support is anticipated, signalling an ongoing commitment to economic revival.  

Impact on global markets 

While Chinese equities rallied over 20% in the last six days of September, the market impact of China’s stimulus is not limited within its borders. European stocks, particularly luxury goods companies, saw gains on the prospect of increased consumer spending in China. Commodity prices, including copper and aluminium rose in anticipation of a rebound in manufacturing activity.  

While the announcement resulted in a positive initial market response, questions remain about the long-term effectiveness and sustainability of these measures. We will continue to monitor key indicators in the coming months, including consumer spending trends, manufacturing output, and property market stability to get a sense of the follow through of the stimulus package for the Chinese and global economy. We are currently overweight Chinese equities in client portfolios.