Wall Street rises and Dollar drops on US rate cut expectations

Wall Street stocks are hitting record highs and the US Dollar is threatening to continue its downtrend as US rate cut bets ratchet up. For the markets, it’s not a matter of if the Fed cuts interest rates in September: it’s a question of how much. Signs of a downturn in the labour market have pushed futures to bake in a series of rate cuts before the end of the year. But a new temporary dove on the Fed board in Stephen Miran, the prospect of a pre-selected Fed Chair US President Donald Trump, and calls overnight from Treasury Secretary Scott Bessent for 150 basis points of cuts going forward, including a 50 point move at the next meeting, has pushed rates markets to price-in the slim chance of just that. 

(Source: CME Group)

Inflation data from earlier in the week is also being pointed to as pushing the door further ajar for deep rate cuts, although the figures weren’t so clear cut. Core inflation picked up to 3.1%, which was in line with expectations but the less important headline figure rose by less than expected. The latter seems to be what the markets have latched onto, despite it being noisier and not the Fed’s preferred measure. Another part of the story is that the Fed has indicated in its previous forecasts that it is willing to look through temporary, tariff related price shocks and still cut rates. It’s a reaction function the markets appear to be latching onto to justify rates market pricing.

US indices surge and Dollar slides with market sentiment bullish

The drop in the front end of the curve has boosted equity valuations, with Wall Street breaking out to a fresh record high, in a very positive technical signal. The move was led by cyclicals as small caps outperformed their mega-cap brethren. The large end of the market is still providing the foundations of this rally: once again, double digit earnings growth for the quarter for the S&P 500, led by tech giants, is keeping equities supported despite lofting valuations and stretched positioning. In another sign of rate market dynamics and risk appetite, the VIX has hit a nine month low, the US Dollar is sliding once more, with Bitcoin also testing records.

(Source: Trading View) 
(Past performance is not a reliable indicator of future results)