The Overnight Report: US Rally Not Sustained

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As expected, the Fed cut rates by -25bps with a initial 400pt rally in the Dow fading on Powell's presser. US markets finished mixed.

After a down day yesterday, the ASX200 futures are pointing to another soft start.

Good Morning,

The ASX200 fell -59.2pts or 0.67% on Wednesday, marking its largest decline in two weeks as eight of eleven sectors went backwards.

Profit taking pushed gold miners lower.

SPI futures are signalling yet another weak opening awaits for the local market.

What happened overnight, NAB Markets Today Research extract

The FOMC cut -25bp, as widely expected. The post meeting statement said the rate cut was justified “in light of the shift in the balance of risks”,  and no longer described the labour market as “solid”.

An initial dovish market reaction was quickly reversed, leaving the dollar higher, but the market reaction was muted to what was ultimately a well-telegraphed adjustment. The Bank of Canada also cut.

There was ‘only’ one dissent, with Stephen Miran dissenting in favour of -50bp. The dot plot, both the median and distribution, has broadly level shifted down -25bp relative to June. The 2025 median at 3.625% supported the initial dovish reaction, but the median was only one participant away from 3.875% and seven participants saw no further easing this year (recall in June 7 participants saw no cuts by year-end).

The median dot in 2026 shows 3.375%, a further -75bp of cumulative easing and shows 3.125% for 2027 and the new 2028 projection. The long run dot was unchanged at 3.0%.

In the press conference, Powell described the action as a “risk management” cut and said there “wasn’t widespread support at all” for a -50bp cut. He noted consumer spending was stronger than expected and that “it’s not a bad economy”.

He said the cut reflects in part the shift in the balance of risks, “downside risks to employment have risen.”

The median dot for GDP growth was revised higher, to 1.8% from 1.6% over 2026, and the unemployment median was little changed, 4.5% at the end of the year (prev 4.5%) and 4.4% end 2026 (prev 4.5%). PCE inflation in 2026 was revised up to 2.6% (prev 2.4%) but remained at 2.1% for 2027 and the new 2028 dot is at 2.0%.

Overall, the message is the balance of risks has shifted enough for some adjustment to a ‘more neutral’ position, and a narrow majority of FOMC participants see that process extending to one or two additional cuts this year.

The committee remains divided about how much adjustment is appropriate given still elevated inflation, and the dots stopped well short of matching market pricing for the depth of cuts in 2026.

There were two interesting outliers in the 2025 dots. One dot remained at 4.375% (presumably a non-voter). On the other side, the low for 2025 was at 2.875%, implying that Miran saw back to back -50bp cuts for Sep, Oct and Dec meetings. That is a view that has little support. It was the only dot below 3.625%. With some renewed focus on the ‘third mandate’ of moderate long-term interest rates, Powell said it is a result of achieving stable prices and full employment rather than a distinct thing to work towards.

After some initial volatility, it was a relatively muted market reaction. US yields were drifting higher ahead of the meeting, initially dropped on the decision, but quickly retraced. The 2yr yield was near 3.54%, dropped to 3.47% before quickly reversing to be back near 3.55%. The 10yr briefly dipped below 4% at 3.99%, but also reversed sharply, back around 4.08%, 5bp higher over the day.

In FX, the USD initially fell alongside US yields, down -0.5% against the euro, but also quickly reversed and is stronger over the day. Bloomberg notes it was the seventh straight time the dollar rose on a Fed day, the longest such winning streak since 2001. The euro fell -0.4% on the day at 1.1814, but remains 0.8% higher week to date. The JPY lost -0.3% against the dollar. AUD fell -0.4% to around 0.6655. A pop above 67c to the intraday high of 0.6707 was alongside the initial USD negative reaction and vanishingly short-lived.

In equities, the S&P500 was briefly higher and closed down just -0.1%. The Nasdaq was -0.3% lower.

Earlier in the day, the Bank of Canada also cut rates by -25bp as expected, to 2.5%, and also cited shifting balance of risks. That was the first cut since March.

Governor Macklem said inflation pressures looked contained and tariffs are weakening the Canadian economy, but they are going to proceed carefully and won’t be as forward looking as normal. Macklem said that “with a weaker economy and less upside risk to inflation, governing council judged that a reduction in the policy rate was appropriate to better balance the risks going forward.”

While there was a ‘clear consensus’ for a cut, policymakers also considered holding rates steady. Another cut is likely in the next couple of meetings. Markets are 50% priced for October and -19bp are priced by December.

In the UK, CPI was in line with expectations, doing nothing to shift expectations from a BoE hold today. Headline was steady at 3.8% and core slid -2 tenths to 3.6%, both as expected. Services inflation slowed to 4.7%, helped by a fall in volatile airfare prices.

Fed cut to spark bull run, deVere Group extract

The Federal Reserve’s latest move is a watershed for markets, setting off the opening stage of a potential worldwide bull run, and the Fed has fired the starting gun.

On Wednesday, the central bank lowered its benchmark rate to a 4.00–4.25% range and, in a statement highlighting labour-market weakness, projected two further reductions before year-end. 

The Dow Jones Industrial Average immediately surged more than 400 points, US Treasury yields fell and markets priced in deeper easing.

A quarter-point cut with a clear plan for two more this year, and an explicit focus on employment over inflation, will combine to deliver the most powerful signal we’ve seen in more than a year and global investors are expected to act now and not wait.

The Fed is telling the world it will prioritise jobs and growth with markets understanding the implications of cheaper money, a softer dollar, and an extended expansion of monetary policy. There will be decisive positioning across portfolios.

US consumer prices are still running at 2.9% year-on-year, yet job creation has slowed to just 22,000 and unemployment claims have climbed to multi-year highs. 

 Policymakers can tolerate a little extra inflation, but they’ll not risk a hard landing. This is why the Dow jumped 400 points within hours and why capital is flowing into risk assets globally

Tech and infrastructure plays are regaining momentum as financing costs drop, as well as expanded allocations to Bitcoin and other digital assets as real rates fall and liquidity rises. These are not tentative moves, capital is shifting.

Politics will reinforce the momentum. President Trump wants strong growth heading into the mid-terms, and the Fed is now aligned with that objective. Fiscal and monetary policy are pulling in the same direction to sustain expansion.

While upcoming jobs and inflation data will inject bouts of volatility, the direction is set and every release will either confirm the Fed’s hand or accelerate it. Those holding back for perfect clarity will pay a premium to catch up.

The era of restrictive policy is ending and the Dow’s 400-point surge is likely to be only the beginning. 

Investors, we believe, across the world are positioning for what could be a sustained rally because this is the decisive shift, and guidance that they’ve been waiting for in many cases.

Corporate news in Australia

-The Adnoc led group has pulled the $36bn takeover bid for Santos ((STO)).

-The Energy Australia merger with Alinta has stalled.

-Mitsubishi has acquired a 15% stake in FleetPartners Group ((FPR)) on top of the existing 5.1% stake held and is not expected to bid for the company.

-Macquarie Group ((MQG)) was in discussions to acquire Carlyle Group earlier this year, which amounted to nothing.

-Metrics Credit Partners was hosted by Pinnacle Investment Management ((PNI)) at a seminar, with the CEO noting they are addressing governance concerns and feedback.

-BHP Group ((BHP)) is cutting -750 jobs in its Qld coal operations, mothballing a mine and possibly closing a skills and training academy to cut costs.

-DroneShield ((DRO)) has won a $7.9m US defence contract. 

-Alternative asset manager Aura Group is set to IPO for $150m on the ASX.

On the calendar today:

-NZ 2Q GDP

-AU Aug Labour Force

-JP July Machine orders

-EZ July C/A

-UK BoE Bank rate

-US FOMC rate decision

-US Sept Jobless Claims

-US Sept Phil Fed outlook

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FNArena’s four-weekly calendar: https://fnarena.com/index.php/financial-news/calendar/

The Australian share market over the past thirty days…

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