Markets signal rate cuts: what you need to know

European stocks followed gains in Asian markets amid expectations that Wednesday’s US consumer price report could pave the way for the Federal Reserve to begin cutting interest rates by September.

UBS Group AG led the rise in European financial services shares after surpassing second-quarter profit forecasts, driven by strong client inflows and investment banking revenue. Meanwhile, miners fell as iron ore prices dropped to their lowest levels since May 2023, with Rio Tinto Group declining 1.8% on concerns about demand in China.

The MSCI benchmark for Asian stocks climbed for a fourth consecutive session, recovering further from last week’s downturn. US equity futures remained steady following a 1.7% surge in the S&P 500 on Tuesday, spurred by cooler-than-expected US producer price data.

The easing of inflationary pressures in the US has strengthened the belief that the Federal Reserve may soon lower borrowing costs, allowing a shift in focus to supporting the labor market. Forecasts suggest a modest 0.2% rise in both the consumer price index and the core measure excluding food and energy, potentially marking the smallest three-month increase in the core measure since early 2021.

“Global markets appear to be regaining confidence after last week’s recession fears,” said Jun Rong Yeap, a strategist at IG Asia Pte. “Progress in easing US producer prices, which could signal further cooling in consumer prices, has provided additional support for the ongoing risk rally.”

GBP outlook

The British pound weakened against the dollar after UK inflation data fell short of expectations. The Consumer Prices Index rose by 2.2% in July, following a 2% increase in each of the previous two months, compared to economists’ predictions of 2.3%. For the first time since August 5, traders fully priced in a half-point of additional Bank of England rate cuts by year’s end.

UK government bonds surged following the inflation data, while US Treasuries were little changed after gains across the yield curve in the previous session. A Bloomberg index of the dollar stabilized near a four-month low.

NZD outlook

New Zealand’s 10-year benchmark bond yields fell sharply as the central bank unexpectedly cut rates by 25 basis points, signaling the start of an easing cycle earlier than anticipated. The kiwi dropped over 1%, while local stocks rallied.

JP225

In Japan, the Nikkei saw fluctuations as traders reacted to news that Prime Minister Fumio Kishida would not seek a second term as leader of the long-dominant Liberal Democratic Party in September. The yen steadied after earlier nearing the 146-per-dollar level.

US indices

On Wall Street, the S&P 500 recorded its largest four-day rally this year, bringing the index closer to testing a significant technical threshold. The Nasdaq 100 advanced 2.5%. The VIX, a popular volatility gauge, dropped to around 18. Swap traders factored in a roughly 40 basis-point Fed rate cut in September, with a total reduction of over 105 basis points anticipated for 2024.

Energy

Oil prices rose, rebounding from Tuesday’s losses, following an industry report indicating a significant decrease in US crude stockpiles and ongoing tensions in the Middle East. Iron ore prices continued to weaken after China’s largest steel producer warned that the nation’s steel industry faces a crisis more severe than the downturns of 2008 and 2015, describing current conditions as a severe winter.

Conclusion

As markets rebound and central banks signal potential rate cuts, it’s essential to stay nimble and informed. The easing of inflation pressures offers a chance for traders to capitalize on new opportunities, but caution is key. Diversify your portfolio to manage risks, stay updated on economic indicators, and consider the potential impact of geopolitical developments.

In these volatile times, a balanced approach can help you seize gains while protecting against downside risks.