September 2024

Market Commentary

The Long Way Down
(3 min read)

Last week the US Federal Reserve cut interest rates by ½% from 5.5% to 5.0%. The interest rate cut had been widely expected but market participants were less certain of the size of the move. A ½% cut, in an historical context, is quite unusual. Most easing cycles are characterised by ¼% cuts unless policy makers are faced with an immediate economic crisis.

Although unemployment is at near historical lows and core inflation remains stubbornly above the target rate, the rhetoric from the Fed that accompanied the rate move suggested that the US economy might achieve a soft landing.

Downward revisions to job creation in the labour market and further improvements to inflation justified the aggressive move in rates, as does the recent survey data which implies the economy is slowing. The bond market is pricing in further significant cuts going into year end and beyond. As was the case this time last year, we think the bond market might be getting a bit ahead of itself with 10-year US Treasury yields at 3.7%.

Elsewhere, the Chinese central bank has been easing monetary policy in a desperate attempt to help the government achieve its 5% growth forecast and in Europe the weaker economic data would suggest that the European Central Bank (ECB) will continue to cut interest rates when it meets in October 2024. The only potential laggard in this global monetary easing cycle could be the Bank of England which will need to digest the economic implications of the much-anticipated 30th October budget when it meets on 7th November.

The recent GBP strength versus both the USD and EUR suggests that the market expects UK interest rates to remain higher relative to the US and Euro Zone. The generosity of recent public pay awards might force the Bank of England to be more cautious in reducing the cost of borrowing.

That all being said, easier global monetary policy should be supportive for markets and broaden the performance across the different equity market sectors, but the upcoming US election and economic uncertainties are likely to result in continued volatility along the way. 

Peter Geikie-Cobb | Head of Investment Research
Montgomery Associates
September 2024

US Short Term Interest Rates
Source: Federal Reserve

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