Asian currencies rallied against the dollar on Monday, while gold surged to a new record, as traders increased their wagers on further Federal Reserve policy easing. Market participants are now pricing in nearly three-quarters of a point of rate cuts by the end of the year, with expectations that at least one more significant rate reduction is on the horizon.
The latest U.S. economic data reinforced this outlook. A report showed that business activity in the U.S. expanded at a slightly slower pace in early September, while business expectations deteriorated, and a gauge of prices received hit a six-month high. These developments have stoked investor confidence that the world’s largest economy might achieve the much-sought-after “soft landing,” where inflation subsides without triggering a sharp downturn. Investors are now keenly awaiting further clues on the Fed’s path when data on the central bank’s preferred inflation gauge and U.S. personal spending is released later this week.
Fed Officials Signal Openness to Further Rate Cuts
Fed officials have remained largely open to the idea of further rate cuts. Chicago Federal Reserve President Austan Goolsbee emphasized that with inflation nearing the Fed’s 2% target, the focus should increasingly shift toward the labor market. “That likely means many more rate cuts over the next year,” Goolsbee remarked, suggesting that the Fed’s easing cycle is far from over.
Echoing Goolsbee’s sentiment, Minneapolis Fed President Neel Kashkari pointed to emerging signs of weakness in the U.S. labor market. Kashkari backed the idea of cutting rates by another half percentage point before the end of the year, reflecting concerns that persistent labor market fragility could undermine the Fed’s inflation-fighting efforts. In contrast, Atlanta Fed President Raphael Bostic adopted a more cautious tone, arguing that while starting the cutting cycle with a large move might bring interest rates closer to neutral levels, the central bank should avoid committing to an overly aggressive series of outsized rate reductions. Bostic’s remarks suggest a preference for more gradual adjustments as the Fed assesses the trajectory of the economy.
Positive Outlook for Global Stocks, Commodities
In light of the Fed’s apparent dovish tilt, analysts at SARACEN MARKETS have laid out a favorable narrative for global stocks, gold, and commodities over the next 6 months. We predict that continued Fed rate cuts will provide a significant boost to U.S. equities, which historically have risen 70% of the time in the six months following a Fed rate cut. The prospect of looser monetary policy is also seen as a tailwind for gold and commodities, as lower interest rates tend to reduce the opportunity cost of holding non-yielding assets like gold.
The expected easing cycle comes at a time when markets are grappling with mixed signals. While inflation has shown signs of cooling, economic growth remains uncertain, and global central banks are moving at different paces in their policy adjustments. The Fed’s commitment to further rate cuts, however, is likely to provide a degree of stability to risk assets, especially U.S. stocks, which are expected to perform well as investors adjust to a lower interest rate environment.
Looking ahead, market participants are increasingly focused on the interplay between inflation, labor market conditions, and the Fed’s response. The upcoming release of the core Personal Consumption Expenditures (PCE) index, the Fed’s preferred measure of inflation, along with data on U.S. personal spending and income, will be critical in shaping expectations for the next steps in monetary policy. Should the data confirm that inflation continues to ease without significant deterioration in the labor market, the Fed is likely to continue its gradual easing cycle, supporting risk sentiment and fueling optimism across global markets.
In summary, as Asian currencies gain ground and gold climbs to record levels, market participants are bracing for further monetary easing from the Federal Reserve. With key U.S. data on inflation and spending set to provide crucial insights into the Fed’s future moves, investors are positioning themselves for a favorable market environment, particularly in equities and commodities.