The Overnight Report: Fed Rate Cuts Are Coming

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By Chris Weston, Head of Research, Pepperstone

Good morning.

It’s been a huge 24 hours in financial markets, and we close out the month of July with outsized moves playing out across asset classes Have we hit a sweet spot again for risk assets, with Fed cuts all but assured, US labour markets cooling but not collapsing, inflation glacially falling inline and solid company EPS growth?

One could argue that is the case, at least for now, but trends in the economic data flow hold the key, and we know that there is a stark difference between insurance rate cuts, which is the market’s current base case, relative to where the Fed and other central banks need to consider more front-loaded rate cuts a sign of greater concern, and a dynamic which would see much more liberal de-risking through equity and risk assets.

We’ve seen the market pricing in Australian interest rate futures shift from a debate around the probability of an August rate hike (from the RBA), to one of higher for longer, and whether we could realistically get a -25bp rate cut before year-end. The ASX200 is the key beneficiary of this psychological shift, and the relief that this rates cloud has been removed has seen the index break out to new highs with real venom.

To some surprise from the more cynical traders, the BoJ did not disappoint with the degree of hikes that had been speculated on in the local press, and while there was no initial reaction to the hike, and the taper to the future bond buying, the JPY has rallied hard, and gone for it, with USDJPY now oscillating around JPY150. 

US tech and AI-plays have gone for it

US equity has been well traded, with solid flows in the NAS100, where Nvidia has had a breathtaking rally and added nearly US$330bn in market cap on the day. Semis and AI names have feasted off the guidance and outlook from AMD’s report, and traders have been buying and chasing the move in Nvidia, as they have in Broadcom, Marvell, and Super Micro Computers. I had been skewed for better relative performance from the Dow over the NAS100, but that is clearly the wrong position to be in, for now, and take that one firmly off the table.

This flow towards tech/AI plays was then given additional legs aftermarket, with Meta and Qualcomm delivering the goods for investors in the aftermarket session we can look at the beats in their various earnings metrics across the board, but when we hear from Meta that they “see significant capital expenditure growth in 2025”, we see that as a sign of real underlying confidence and having a significant impact on the future of US tech.

A more explicit Fed more than meets the mark

The Fed meeting will be sliced and diced by all, but the wash-up was that Powell and co more than met market pricing and expectations for cuts in September, and more into the December FOMC. The reaction in markets to Chair Powell’s presser speaks volumes, where we saw solid buying across the US Treasury curve (yields lower), with the USD losing ground against nearly all major currencies and growth equity has not looked back.

We await the FOMC minutes (due 21 August) to see the number of Fed officials who felt the Fed needed to cut at this meeting. However, Jay Powell was more explicit in his guidance than many thought was likely, and unless something dramatic happens from here, the Fed will likely start the ball rolling on easing on 18 September.

Another highlight was the further confirmation that the US labour market is of equal importance to inflation and that suggests some creeping concerns of future economic fragility that will need to be skilfully managed. Friday’s nonfarm payrolls will therefore wear an increased risk premium for markets, and heightened volatility around the jobs print seems assured if it’s important to the Fed, it’s important to market pricing.

In theory, it is now not out of the realm of possibility, if we do get higher unemployment in tomorrow’s US payrolls, that US rates/swaps markets start to gradually price a premium for a -50bp cut in September, especially with increasingly concerning headlines from the Middle East.

For now, though, we see the NAS100 ripping, and we look ahead at earnings from Apple, Amazon, and Intel after-market, and given the levels of implied volatility in these names, we could be in for another lively session ahead.

We also see crude on a tear, and gold also captures big flows as we push towards US$2450, the all-time closing high of US$2469, and the intraday high of US$2483/oz.

On the calendar today:

-Australia June trade balance

-UK BoE policy rate

-US ISM manufacturing July

-Kelly Partners Group ((KPG)) earnings report

-SSR Mining ((SSR)) Qtrly Report

Corporate news in Australia:

-Newspaper journalists at Nine Entertainment ((NEC)) have accepted improved wage deal following five-day strike

-Financial platform Stake has secured its own Australian Financial Services Licence

-Brightstar Resources ((BTR)) and Alto Metals ((AME)) are merging in an all-scrip deal

-Scentre Group ((SCG)) is buying a 50% stake in Westfield West Lakes for $167.3m, at a 10% discount to its book value

-Westpac ((WBC)) is selling its retail auto loan back book

-Yet another capital raising by DroneShield ((DRO))

-Yesterday, Telix Pharmaceuticals’ ((TLX)) shares dropped after the FDA rejected its application for a renal cancer imaging agent

Michael Brown Senior Research Strategist at Pepperstone

The FOMC, as widely expected, and fully discounted by financial markets, maintained the target range for the fed funds rate at 5.25%-5.50% at the conclusion of the July meeting. However, Powell & Co dropped clear hints that a rate cut is on the horizon, likely as soon as the September meeting, via some notable changes to the policy statement.

Most notably, the statement flagged how the Committee is now attentive to risks on “both sides” of the dual mandate, ditching the laser-like focus on inflation that has been the dominant theme of this cycle so far. Furthermore, in additional nods towards a September cut, the statement flagged how “some” further progress towards 2% inflation has been made – an upgrade on the prior “modest” description – while job gains were said to have “moderated”, in light of increasing signs of labour market fragility, and a more cautious phrasing than the “remained strong” description used last time out. While not an explicit pre-commitment, this is clearly a Committee preparing itself to deliver a cut in the very near future.

While the Committee remains data-dependent, all signs point to the first rate cut coming next time around, at the September meeting. Following this, further reductions at a quarterly pace, in line with the publication of updated Summaries of Economic Projections, seems likely, leading to a cumulative -50bp of cuts this year, marginally more hawkish than markets currently price – barring, of course, any adverse data surprises, or external shocks.

Such a pace of easing would be, roughly, in line with that set to be delivered by other G10 central banks, limiting potential USD downside, with risks to the greenback actually tilting in the opposite direction, owing to the US economy’s continued strong growth, and the anaemic pace of expansion seen elsewhere.

Meanwhile, the path of least resistance, despite the recent blip, should continue to lead to the upside for equities, with the ‘Fed put’ still alive and well, along with both economic, and earnings, growth remaining solid. The Treasury curve, finally, should continue to steepen, as the Fed increasingly move towards targeting an inflation ‘range’, as opposed to an outright 2% price level.

The Australian share market over the past thirty days

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