US equity futures surged on Thursday following the Federal Reserve’s indication of a potential rate cut in September. This development comes as the Bank of Japan (BOJ) Governor Kazuo Ueda announced the possibility of further rate increases, contingent on the central bank’s inflation forecasts. The yen hit 148.51 against the dollar, its highest level since March, marking an 8% gain over the past month. The BOJ’s decision to raise rates has heightened market volatility, prompting some carry trades to reverse. While this doesn’t signal the end of Japan’s bull market, it suggests a pause and a potential pivot back to domestic sectors.
The dollar index experienced its steepest decline since May on Wednesday, bolstering rallies in emerging markets and Asian currencies. Many Asian currencies are expected to appreciate against the US dollar in the near term. US Treasuries fell in Asian trading, partially reversing a Wednesday rally that saw yields plummet by 10 basis points or more across the curve due to optimism about a Fed rate cut.
The Fed’s updated statement highlights a shift in tone among policymakers, including Chair Jerome Powell, acknowledging increasing risks to the labor market. This shift is likely to strengthen economists’ and investors’ expectations for a rate cut at the Fed’s September 17-18 meeting.
Powell’s comments last night were definitely positive for risk assets as they strongly hinted at a cut in September. With the US economy remaining resilient and confidence growing that inflation is on target, the risk of a recession is being pushed further out. Interest-rate swaps indicate that traders are fully pricing in a quarter-point cut in September, with expectations of a total reduction of nearly 70 basis points for the year.
Powell is aligning with the data, and he’s preparing to act. The upcoming jobs report on Friday and the Consumer Price Index (CPI) in two weeks are critical. If those indicators align favorably, we might see clearer guidance from Powell at the Jackson Hole symposium in late August.