As we head into a pivotal week for the US markets, the focus remains squarely on the Federal Reserve and its upcoming policy meeting. The Federal Open Market Committee (FOMC) will conclude on September 18, and investors are eager to gauge whether the Fed will initiate the highly anticipated rate cut. Speculation remains over whether the Fed will opt for a 25-basis-point cut or the more aggressive 50-basis-point cut. The central bank’s decision will not only set the tone for the remainder of the year but also influence markets’ expectations about future policy actions.
Key Data to Watch:
- Retail Sales (August): While August retail sales are not expected to drastically shift the Fed’s stance, they will give clues about the strength of consumer spending, one of the key drivers of the US economy. Notably, auto sales have shown resilience, pacing 1% higher than last year. However, any signs of slowing consumer activity could deepen market concerns over an economic slowdown.
- Industrial Production: Following a 0.6% decline in July, economists expect only a slight gain in August, reflecting the ongoing challenges in US manufacturing. Despite reshoring efforts, the US continues to shed manufacturing jobs, with 32,000 jobs lost this year.
- Housing Starts: The housing market remains under pressure, with starts running about 5% below 2023’s pace. Any surprises here could shift views on economic growth and the health of the housing sector, particularly after the Fed’s rate actions.
The Federal Reserve’s Decision
The FOMC meeting is the week’s key event. With odds close to 50/50 on whether the Fed will cut rates by 25 bp or 50 bp, markets are preparing for volatility. A 50 bp cut would send a strong signal of a more aggressive easing cycle, potentially boosting risk assets like equities, but weakening the US dollar. A 25 bp cut, especially if presented with dovish guidance, could still provide support to markets, though perhaps with less enthusiasm.
Fed Chairman Jerome Powell is expected to address whether this week’s rate cut will front-load easing anticipated for 2025-2026 or signal additional cuts this year. Investors will also look for any updates in the dot plot projections to gauge the Fed’s future trajectory.
Other Central Bank Actions
While the Fed will dominate the spotlight, several other G10 central banks are meeting this week, including the Bank of England (BoE), Bank of Japan (BoJ), and Norges Bank. The BoE is not expected to move rates this week but remains under pressure, with markets pricing in two rate cuts by year-end. BoJ, meanwhile, has kept its rates steady, though there is growing speculation around a possible shift in its policy approach later this year.
Currency Movements and Market Reactions
The US dollar has been on a volatile ride, reacting to shifting expectations around the Fed’s policy. The Dollar Index (DXY) remains under pressure, with the greenback sliding against major currencies like the Japanese yen and euro. Any surprise Fed action could see further dollar weakness, benefiting commodities like gold and pushing equity markets higher.
Equities have seen modest gains as market participants weigh the likelihood of a Fed cut. The S&P 500 has bounced off key support levels, while volatility is expected to spike ahead of the FOMC meeting. Investors should remain cautious as earnings revisions and economic growth concerns continue to create an uncertain backdrop.
Sectors to Watch:
- Financials: A rate cut could ease borrowing costs and potentially boost bank stocks, although margin pressures from lower rates could weigh on earnings.
- Consumer Discretionary: As retail sales data are released, the sector will provide key insights into the resilience of the consumer.
- Technology: Rate-sensitive tech stocks could benefit from lower borrowing costs, particularly if a 50 bp cut is delivered.
Outlook
In summary, investors should brace for a potentially volatile week, with the FOMC meeting serving as the central event that could drive both US and global markets. Key economic data releases in the days leading up to the meeting will help economists fine-tune their Q3 GDP forecasts and further shape market expectations. The ongoing divergence between central banks across the globe also warrants attention, particularly for currency traders and those invested in global markets.
For now, all eyes are on the Fed, with markets on the edge of their seats, awaiting what could be the start of a new easing cycle.
Disclaimer: ProsperUs Head of Content & Investment Lead Billy Toh doesn’t own shares of any companies mentioned.
