Asian stocks experienced a dip this morning while European markets remained steady, yet U.S. equity investors appear undeterred, buoyed by renewed optimism for a potential interest rate cut by the Federal Reserve in December. The Nasdaq 100 saw a premarket increase of 0.46%, while S&P 500 futures rose by 0.25% after the index closed up by 0.98% on Friday.
Last week, sentiment on Wall Street suggested that the probability of a December rate cut had dimmed significantly, with the CME Fedwatch futures index estimating only a 30% chance of a reduction. A projection from JPMorgan indicated that any rate cut would more likely occur in January, which contributed to a more pronounced sell-off, with the S&P 500 witnessing a 2% decline amid escalating concerns of a potential bubble in the AI sector.
However, current trading shows a marked shift in outlook, with speculators now estimating a 75.5% likelihood that Federal Reserve Chairman Jerome Powell will announce a rate cut. This change can be attributed to a recent speech by John Williams, the New York Fed President and FOMC Vice Chair, in which he hinted strongly at the possibility of a cut next month. Williams pointed out, “My assessment is that the downside risks to employment have increased as the labor market has cooled, while the upside risks to inflation have lessened somewhat,” indicating that he believes a rate adjustment could be imminent.
In assessing the Fed’s dual mandates of supporting employment and controlling inflation, analysts had previously thought these factors were in equilibrium, suggesting that rates would remain unchanged in December. However, the evolving economic landscape, particularly in light of a government shutdown that has masked labor market data, has prompted most analysts to believe that job growth is slowing, with unemployment rates on the rise.
Goldman Sachs’ Jan Hatzius noted the importance of delayed employment data, suggesting that the forthcoming September jobs report may now be pivotal in confirming a 25 basis point cut at the FOMC meeting set for December 9-10. His insights reflect what many believe to be consistent with Chair Powell’s own views.
Analysts from Pantheon Macroeconomics have weighed in, asserting that Williams’ statements are particularly significant due to his historical alignment with majority opinions within the FOMC, indicating he would not take such a stance without prior consultations with the Board of Governors, including Chair Powell.
As the market awaits the opening bell in New York, this prospect of a rate cut may invigorate investor sentiment, potentially laying the groundwork for a stronger performance in equities as economic indicators continue to unfold.