Stocks extend gains as a 50bps Fed cut becomes more likely

50bps Fed rate cut is now the main scenario

Markets continue to dance to the tune of Wednesday’s Fed meeting. Chances of a 50bps rate cut got a strong boost yesterday with the market currently pricing in a 67% probability that history will repeat itself and the Fed will once again start its easing cycle with half a percent move.

This is quite a turnaround from last week when a 50bps rate cut was considered a risky option as it would signal to the markets that the Fed is clearly worried about the possibility of a US recession and has hence decided to act sooner rather than later.

US equity indices have probably changed their mind and appear to be enjoying the possibility of a stronger rate cut. The Dow Jones 30 index recorded a new all-time high on Monday and the S&P 500 index experienced its sixth consecutive green session, driven by the energy and financial sectors. The S&P 500 continues to lead the rally in 2024 with a sizeable jump of 18%.

Dollar remains under the weather

The dollar remains on the back foot as a total easing of 120bps is now expected for 2024, which means that the Fed is now seen cutting at every meeting in 2024, including the November 7 one, and announcing at least two 50bps rate moves in September and December when the dot plot is published.

Considering the momentum of the US economy, the current market pricing seems out of place and exaggerated. The main data releases before the Fed meeting are today’s retail sales and a plethora of housing-related indicators. Economists are forecasting a 0.2% drop in monthly retail sales with the retail sales control group indicator, which tends to reflect consumer spending more accurately, expected to record another positive print.

Loonie to suffer from weak CPI

With the market’s attention fixed on the Fed, the August CPI report from Canada will be published later today. With the Bank of Canada paving the way for other central banks with its June 5 rate cut and remaining relatively dovish, today’s inflation print could determine the size of the October 23 rate cut. Confirmation of forecasts for another slowdown in inflationary pressures should boost expectations for a 50bps BoC move and keep the loonie under pressure against the ailing dollar.

Gold remains bid 

Gold is the main beneficiary of the pre-Fed sentiment with the precious metal testing the $2,590 level. The dollar’s underperformance and the freefall in the 10-year US yield are maintaining the demand for gold, despite the fact that China’s central bank remains on the sidelines. Unconfirmed headlines that the US has proposed another ceasefire between Israel and Hamas appear to have little impact on gold at this stage.