Markets update: Markets react to the Federal Reserve cutting interest rates by 50 basis-points

The highlight of the week was the Federal Reserve’s rate announcement after its policy meeting concluded on Wednesday, writes Ian Slattery.

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The initial market reaction to the Fed’s decision to reduce rates by 50 basis points was relatively muted, with the S&P 500 Index slightly declining by the end of the day. Historically, market declines have not been uncommon at the onset of a Fed rate-cutting cycle. However, investor enthusiasm emerged on Thursday morning, as major indexes reached record highs in a broad rally. 

The week’s economic data was generally positive. Retail sales increased by 0.1% from July to August, surpassing expectations, following a revised 1.1% rise in July. Additional evidence of consumer strength appeared on Thursday with a surprising drop in weekly jobless claims. 

In Europe, major equity indexes ended the week lower as the rally sparked by the US rate cut lost momentum, and investors grew cautious regarding future monetary policy. Recent comments from a hawkish European Central Bank (ECB) suggested that further easing should be gradual due to persistent underlying inflation pressures. In the eurozone, hourly wages and salaries grew at an annual rate of 4.5% over the three months ending in June, down from a revised 5.2% in the previous period.

The Bank of England (BoE) kept its key policy rate steady at 5.0%, as expected. UK headline inflation remained at an annual rate of 2.2% in August, unchanged from July. However, year-over-year price increases in services, closely monitored by the BoE due to the wage component, rose to 5.6% from 5.2%. 

Japanese equities benefited this week as the yen weakened following the US rate cut decision. On Friday, the Bank of Japan’s (BoJ) decision to maintain rates put further pressure on the yen. Consequently, the Japanese currency depreciated to around JPY 143.8 against the US dollar, down from approximately 140.8 at the end of the previous week.

Equities

Global stocks were up last week finishing at 0.7%% in euro terms and 1.2% local terms. Year-to-date global markets are up by 16.3% in euro terms and by 17.3% in local terms. The US market, the largest in the world, finished at 0.9% in euro terms and 1.4% local terms.

Fixed Income & FX

The US 10-year yield finished at 3.7% last week. The German equivalent finished at 2.2%. The Irish 10-year bond yield finished at 2.6%. The Euro/US Dollar exchange rate finished at 1.12, whilst Euro/GBP finished at 0.84.

Commodities

Oil finished the week at $72 per barrel and is down -0.7% year-to date in euro terms. Gold finished the week at $2,622 per troy ounce and is up 25.7% year-to date in euro terms. Copper finished the week at $9,347 per tonne.

The week ahead

Monday 23rd September

Eurozone PMI data goes to print.

Thursday 26th September

US GDP data is released.

Friday 20th September

US PCE price index is published.