Weekly Commentary

September 20, 2024

The Fed surprised many investors on Wednesday with a 50-bps rate cut, opting for a more aggressive move in the wake of softer retail and employment data over the past several readings.  Initially, markets reacted with a shrug, but by Thursday, a post-Fed rally was in the works, although the market closed below the intra-day highs.  Gold and other rate-sensitive assets rallied especially, and the USD also lost ground against other major currencies, reflecting a more dovish Fed monetary policy and a possible reflation trade.  However, procyclical stocks showed that the economic slowdown is tangible, with Fedex posting weak results and its stock falling by double digits on Friday.

   Rates on the long end shot up following the Fed announcement, with the 10-year yield trading above 3.70%, while the short end was mostly stable, causing the curve to become less inverted.  We tend to think that the Fed was more aggressive at this meeting and could be more conservative in subsequent meetings, taking a more wait-and-see approach going forward.  Also, given that the Fed is more dovish, more inflation-sensitive sectors could outperform and as well as shorter duration.  Certain sectors that were hamstrung by higher rates, such as consumer discretionary and real estate, could benefit from the latest Fed decision, and we are closely monitoring these stocks over the coming days and weeks.

The Fed’s decision will also cement a likely dovish tone from other major central banks, including those that have not cut, including major emerging market central banks, so a rally in those geographies is also in the cards.  In summary, we remain conservative in fixed income duration and in equity sectors, but there could be opportunities in certain sectors and regions that are to benefit from a global rate-cut cycle.