Federal Reserve Goes Big in Rate Cut
Investors anticipated the Fed would cut rates. The question was by how much; 0.25% or 0.50%? The answer came yesterday as the Federal Open Market Committee (FOMC) lowered its target range for the Federal Funds rate by 0.50% to 4.75%‑5.00%. The Fed appears focused on maintaining economic growth noting “Inflation has made further progress toward the Committee’s 2 percent objective but remains somewhat elevated.” Support for the Fed may be seen in recent reports relating to inflation.
The Bureau of Labor Statistics released its Producer Price Index for August, which rose 0.2% month‑over‑month, in line with consensus, and 1.7% year‑over‑year. Final Demand Services rose 0.4%, while both Energy and Transportation & Warehousing declined 0.9% and 0.1%, respectively. Import prices for August declined 0.3%, more than consensus, and reversed the 0.1% increase in July.
The preliminary University of Michigan Consumer Sentiment Index for September came in at 69.0, which modestly exceeded consensus of 68.2 and August’s final report of 67.9.
The Census Bureau reported Retail Sales for August increased 0.1%, versus consensus expectations for a decline of 0.2% and below July’s 1.1% rise. August’s increase was attributed to a 1.4% uptick in non-store (read on-line) sales. Interestingly, only five of 13 categories measured rose in August.
Outside of the United States, the European Central Bank lowered its Deposit Facility rate by 0.25% to 3.5%, following an earlier rate cut of 25 basis points in June.
Equity Sentiment Remains Bullish
Bullish sentiment appears to be driven by expectations for continued rate cuts coupled with the anticipation of an economic soft landing. Going into the FOMC announcement, the S&P 500 achieved a new intra‑day high on Tuesday only to give back most of its gains prior to that day’s close, a phenomenon repeated yesterday after the FOMC announcement. As of yesterday’s close, the S&P 500 is 0.87% from its all‑time high.
The Russell 3000 Index rose 1.6% over the past week. Small caps outperformed large caps, as the Russell 2000 Index advanced 4.9% while the Russell 1000 Index increased 1.4%. Value outperformed Growth across all domestic market capitalizations, the standout being the Russell 2000 Value Index, which rose 5.2% for the week.
Outside the United States, equities rallied in response to both the FOMC and other regional central bank action. The MSCI All‑Country World Index ex-USA advanced 2.2%, EAFE rose 2.1%, while Emerging Markets led the pack rising 2.8%.
Unlike equity performance over the last week, bonds were flat yet exhibit a year‑to‑date return of 4.9%.
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Sources: BTC Capital Management, FactSet, LSEG, Chicago Board of Options Exchange, S&P Global
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