The Davy Digest - 16th September 2024

Global equities finished higher during a busy week for macroeconomic events and data. In the US, Donald Trump and Kamala Harris faced off in their first debate on Tuesday, while August’s inflation print was released ahead of next week’s Federal Open Market Committee meeting. Headline inflation fell to 2.5% year-on-year, driven by lower energy and seasonal effects. Core inflation – which excludes food and energy – came in higher than expected month-on-month at 0.3%, with year-on-year in line at 3.2%. The probability of a 50 basis point cut in the US rose in the latter half of the week, driven by rumours that a larger cut was still on the table. In Europe, last week’s highlight was Thursday’s European Central Bank policy decision and press conference. Christine Lagarde delivered her second cut of 2024, lowering interest rates to 3.50%. Elsewhere, UK unemployment data was released up to the end of July. The figure fell to 4.1% – in line with expectations. In Asia, the yen strengthened further during the week, as Bank of Japan member Junko Nakagawa indicated that further rate hikes were still a possibility going forward.

Last week's highlights

	Presidential debate (10/09) – Prediction markets moved in favour of Harris who is now slight favourite for the election.  US Inflation (CPI) (11/09) – Fell to 2.5% in August, setting the stage for a September rate cut.
	ECB Meeting (12/09) – Cut rates to 3.5% with a further two cuts expected by year-end, and an additional 100 basis points of cuts priced by next summer.
	UK Unemployment (10/09) – Fell to 4.1% in May-July, in line with expectations.
	China Inflation (CPI) (09/09) – Came in below expectations at 0.6% year-over-year.

Next week’s highlights include meetings of several of the major central banks including the Bank of England, Bank of Japan, Norges Bank, and of course the Federal Reserve. Fed Chairman Jerome Powell will announce updated monetary policy and economic projections on Wednesday, while Tuesday’s Retail Sales release will be the major data point in the US and serve as an indicator of consumer health. If the Fed decide to only cut by 25 basis points, they may choose to appease markets by reducing quantitative tightening. In the UK, we will receive August inflation data ahead of Thursday’s Bank of England meeting where Andrew Bailey is expected to leave interest rates at their current levels.

What's on the radar

	US Retail Sales (17/09) FOMC Meeting and Interest Rate Decision (18/09)
	German Producer Price Index (20/09)
	UK Inflation (CPI) (18/09) Bank of England Meeting (19/09)
	Bank of Japan Meeting and Interest Rate Decision (20/09)

Chart of the moment

Cutting to the Chase

Source: Davy, Bloomberg as of 12/09/2024. 

Note: Rate cuts only considered from 1982 when the Federal Reserve began targeting the Federal Funds Rate. A cut is considered recessionary if a recession occurred within 12 months.
 

• Although investors are often advised that the first interest rate cut can be a time to reduce their equity exposure, the reality is not as straightforward
• Since the early 1980s, the Federal Reserve has targeted the Federal Funds Rate as a means of implementing monetary policy.
• By analysing the easing cycles since then, we find that the effect of rate cuts on the equity market largely depends upon the broader economic picture.
• When the Fed begins to loosen monetary policy under the threat of recession, S&P 500 returns tend to remain muted over the following 12 months. However, non-recessionary cuts have produced returns in excess of the index’s average annual return.
• After 14 months on hold, the Fed are likely to cut interest rates on Wednesday – beginning a new easing cycle in the US. However, the subsequent market reaction is likely to depend on continued resilient growth in the next year.