2024-09-19 05:11:14
By Saqib Iqbal Ahmed, Suzanne McGee and Carolina Mandl
NEW YORK (Reuters) – Investors who anticipated furious market swings following the U.S. Federal Reserve‘s bumper rate cut saw more of a muted reaction. That may be fleeting.
Traders had been facing high uncertainty as they awaited the expected rate cut on Wednesday, with a split between those expecting 50 basis points and 25 basis points. The Fed cut rates by an unusually large half-percentage-point.
But while market reaction was muted, with stocks and the dollar reversing positions to mostly come full circle, there could be another wave of action. Some referred specifically to bond yields being at risk of spiking higher after rising on Wednesday.
“The calm, I think is not going to last,” said Brian Jacobsen, chief economist at Annex Wealth Management, which oversees $5.5 billion in assets. He pointed to a reversal in equities late in the day that could set the market up for weakness in stocks “unless and until we get some data giving us a clear sense of direction.”
Jacobsen said the market will be focused on upcoming data such as Thursday’s initial jobless claims.
“The Fed clearly is in catch-up mode and trying to make up for lost time with the cut it’s just made,” Jacobsen said.
There may also be a knock-on effect as the Fed decision ripples through other markets.
“The coming hours could prove dangerous … with traders exposed to sudden riptides as rate expectations are reinforced in other economies,” said Karl Schamotta, chief market strategist at payments company Corpay, about foreign-exchange markets.
“Aftershocks are likely to continue as positioning-related adjustments play out.”
MUTED REACTION
Stock options had priced in a roughly 1.1% swing, up or down, for the , according to options analytics service ORATS. But by the close of trading, the index had snapped a seven-day winning streak to finish down 0.29%, reversing earlier gains.
One reason for the muted market reaction on a close-to-close basis has to do with how asset prices moved in the days leading up to the Fed decision, said Sonu Varghese, global macro strategist at Carson Group. Through Tuesday, the was up 5% over the previous five sessions and the dollar had slipped 0.7%, on expectations for the start of the Fed’s long-awaited rate-cutting cycle.
“It’s a very silly cliche, ‘buy the rumor, sell the news’, but that’s kind of what happened,” said Matt Diczok, head of fixed income strategy at Merrill and Bank of America Private Bank.
On Wednesday, the initially fell, but recovered to trade up 0.1% at 100.981.
“Since this policy move was mostly telegraphed, there is no outsized move in financial markets,” said Jack McIntyre, portfolio manager at Brandywine Global.
Bonds did register a significant move, however, with the 10-year yield spiking by seven basis points on the day, while the 2/10 U.S. Treasury yield curve reached its steepest level since July 2022, after the rate cut, signaling long-term expectations of higher inflation and growth.
Treasury yields, which move inversely to prices, had tumbled to their lowest levels since mid-2023 in the days ahead of the decision.
In a research note, Julian Emanuel, senior managing director at Evercore ISI, recommended positioning for a bounce in yields, and that progress by the Fed on inflation may slow or stall.
Small caps, which initially bounced, ended flat. Traders’ initial reaction was to lift the small-caps-focused Russell 2000 index by nearly 1% in the minute immediately after the Fed decision, making for the index’s largest one-minute percentage gain in at least three months, according to LSEG data.
Smaller companies typically rely more on borrowing, and lower interest rates cut their financing costs, bolstering their profitability and growth.
“To see the jump in small caps specifically, that’s the market buying what the Fed is saying, that they will continue to cut rates next year and that’s a potential tailwind to small caps,” said Ryan Detrick, chief market strategist at Carson Group.
But the Russell index finished up only 0.04% on the day.
Fed chair Jerome Powell said in the meeting that the rate cut marked a “strong start” to protecting strength in the economy.
Still, the outsized rate cut could be read more alarmingly.
“I do think that there will be a lot of profit-taking for investors that came into the day long equity to play this event and we may very well trade lower as the market continues to wonder what is scaring the Fed that we cannot see,” said Matthew Rowe, head of portfolio management and cross-asset strategies at Nomura Capital Management.
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– What factors contributed to the muted market reaction following the Fed’s rate cut?
Table of Contents
Fed Rate Cut: Muted Reaction Now, But Will Market Volatility Return?
Investors bracing for a wild ride following the U.S. Federal Reserve’s surprise rate cut were left underwhelmed by the market’s muted reaction. However, experts warn that this calm may not last, and another wave of market action could be just around the corner.
The Fed’s decision to cut rates by an unusually large half-percentage-point sparked a split among traders, with some expecting a 50 basis point cut and others anticipating 25 basis points. While the initial reaction was lukewarm, with stocks and the dollar reversing course to end near where they started, market analysts are cautioning against complacency.
“The calm, I think, is not going to last,” said Brian Jacobsen, chief economist at Annex Wealth Management, which oversees $5.5 billion in assets. “We’re going to see another wave of action, and it’s going to be driven by the data that comes out.”
Investors are now laser-focused on upcoming economic data, including Thursday’s initial jobless claims, which could provide a clearer direction for the market. The Fed’s decision has put the central bank in “catch-up mode,” attempting to make up for lost time with its aggressive rate cut.
Moreover, the ripple effects of the Fed’s decision are set to impact other markets, potentially leading to sudden and violent market swings. “The coming hours could prove dangerous … with traders exposed to sudden riptides as rate expectations are reinforced in other economies,” warned Karl Schamotta, chief market strategist at Corpay.
Muted Reaction: Buying the Rumor, Selling the News
The stock market’s muted reaction to the Fed’s decision can be attributed to how asset prices moved in the days leading up to the announcement. The S&P 500 had rallied 5% over the previous five sessions, while the dollar had slipped 0.7%, as investors priced in the start of the Fed’s rate-cutting cycle.
“It’s a very silly cliche, ‘buy the rumor, sell the news’, but that’s kind of what happened,” said Matt Diczok, head of fixed income strategy at Merrill and Bank of America Private Bank.
Meanwhile, bonds registered a significant move, with the 10-year yield spiking by seven basis points on the day, while the 2/10 U.S. Treasury yield curve reached its steepest level since July 2022. This suggests long-term expectations of higher inflation and growth.
Small Caps: A Fleeting Bounce?
Small-caps, which typically rely more on borrowing, saw an initial bounce after the Fed’s decision. The Russell 2000 index, which focuses on small-caps, initially jumped nearly 1% in the minute following the announcement, marking its largest one-minute percentage gain in at least three months.
However, the Russell index finished up only 0.04% on the day, as the initial enthusiasm wore off. “To see the jump in small caps specifically, that’s the market buying what the Fed is saying, that they will continue to cut rates next year and that’s a potential tailwind to small caps,” said Ryan Detrick, chief market strategist at Carson Group.
The Fed’s Next Move
Fed Chair Jerome Powell described the rate cut as a “strong start” to protecting the strength of the economy. As the Fed navigates the complex landscape of inflation, growth, and employment, investors will be keenly watching for signs of what’s next.
While the market’s initial reaction may have been muted, experts are warning of potential aftershocks as positioning-related adjustments play out. Will the market volatility return? Only time will tell.
Key Takeaways:
The Fed’s rate cut sparked a muted market reaction, with stocks and the dollar reversing course to end near where they started.
Expert warn that this calm may not last, and another wave of market action could be driven by upcoming economic data.
The Fed’s decision has put the central bank in “catch-up mode,” attempting to make up for lost time with its aggressive rate cut.
Small-caps saw an initial bounce after the Fed’s decision, but the enthusiasm wore off as the day progressed.
* Investors
Fed Rate Cut Sparks Muted Market Reaction, But Volatility Expected to Return
The highly anticipated US Federal Reserve rate cut on Wednesday sparked a surprisingly muted market reaction, with stocks and the dollar reversing their initial gains to end the day near where they started. However, experts warn that this calm may be short-lived, and another wave of action could be on the horizon.
The Fed’s decision to cut interest rates by an unusually large half-percentage point was seen as a bold move to protect the strength of the economy. While the market reaction was initially muted, bond yields spiked higher, and the 2/10 US Treasury yield curve reached its steepest level since July 2022. This signals long-term expectations of higher inflation and growth.
Traders had been facing high uncertainty leading up to the Fed decision, with some expecting a 50-basis-point cut and others anticipating a 25-basis-point cut. The larger-than-expected rate cut caught some off guard, leading to a brief period of volatility.
Experts Warn of Imminent Volatility
Despite the initial muted reaction, experts believe that volatility will return to the markets in the coming days and weeks. Brian Jacobsen, chief economist at Annex Wealth Management, warns that the calm may not last, citing the reversal in equities late in the day as a sign of weakness in stocks.
Jacobsen points to upcoming data, such as Thursday’s initial jobless claims, as a key indicator of the market’s direction. “The Fed clearly is in catch-up mode and trying to make up for lost time with the cut it’s just made,” he said.
Karl Schamotta, chief market strategist at Corpay, agrees that the Fed decision will have a ripple effect on other markets, particularly foreign-exchange markets. “The coming hours could prove dangerous … with traders exposed to sudden riptides as rate expectations are reinforced in other economies,” he said.
What’s Next for the Markets?
So, what’s next for the markets? In the short term, experts are expecting further volatility as traders adjust to the new interest rate landscape. The bond market, in particular, is expected to be active, with yields potentially spiking higher in the coming days.
In equities, the small-cap sector is seen as a potential beneficiary of lower interest rates, as smaller companies rely more heavily on borrowing. However, the sector’s initial gains on Wednesday were largely erased by the end of the day.
The Fed’s Next Move
The Fed’s decision to cut interest rates by a half-percentage point marks a “strong start” to protecting the strength of the economy, according to Fed Chair Jerome Powell. However, the question remains as to whether the Fed will continue to cut rates in the coming months.
Experts believe that the Fed will be guided by incoming data, particularly inflation and jobless claims. If the data continues to show signs of slowing growth and low inflation, the Fed may be forced to take further action to stimulate the economy.
Conclusion
The Fed’s rate cut decision may have sparked a muted market reaction, but experts warn that volatility is expected to return in the coming days and weeks. With bond yields spiking higher and equities struggling to find direction, traders should be prepared for a bumpy ride ahead. As the Fed continues to navigate the complexities of the US economy, one thing is clear – the next few months will be anything but calm.
Keyword List:
Federal Reserve
interest rates
rate cut
stock market
bond market
volatility
Jerome Powell
small caps
economic growth
inflation
* jobless claims
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The Federal Reserve’s surprise rate cut sparked a muted market reaction, but experts warn that volatility will return. Get ready for a bumpy ride ahead as the
