On second thought, 'Insurance cuts' seem good for stocks

Markets

The stock market finally rubbed the sleep from its eyes and sprang to life. What many expected as the immediate response to the Fed’s sharp half-point rate cut didn’t show up on Wednesday, but Thursday had other plans. The S&P 500 surged 1.7%, the Nasdaq Composite shot up 2.5%, and the Dow Jones Industrial Average tacked on 522 points, about a 1.3% jump. Better late than never, right?

US stocks skyrocketed, riding a wave of optimism that the Fed’s jumbo rate cut will engineer the elusive “soft landing” for the US economy. Investors, on second thought, are now applauding Jerome Powell’s savvy move—taking out a 50bps “insurance cut” against a softening labour market. But let’s be clear: the rate cut pipeline is far from dry, and some investors are betting that the speed and size of future cuts will be the deciding factor for equity returns in the months ahead.

There’s precedent for that thinking. From a macro perspective, the fate of the S&P 500 during Fed easing cycles hinges on the economic trajectory. With the Fed’s Atlanta branch “Nowcasting” 3% current-quarter growth, those insurance cuts could indeed foster the fabled soft landing, creating the ultimate bullish backdrop for stocks. A few big Wall Street players are so confident that they’re already booking their year-end tickets for an S&P 500 ride to +6000 Nirvana.

But here’s the kicker: Is 100 bps of total cuts in 2024 necessary when the current economic backdrop isn’t exactly screaming for help? When the following NFP report drops, we'll cross that question—a crucial health check for the US economy.

Let’s talk jobs! Initial US jobless claims dropped like a rock, plunging by 12,000 to hit 219,000 for the week ending September 14—the lowest since mid-May and blowing economists' forecasts out of the water. The four-week average slipped to 227,500, its lowest since early June. And if you’re wondering when the alarms start ringing, claims must shoot past at least 260,000 to hint at the beginning of a real problem.

This jobless report covers the September NFP survey week, making it even more relevant. The data suggests there’s little reason to think the labour market is on the brink of a sharper decline.

In hindsight, it was undoubtedly smart for the Fed to step in big and calm frayed nerves. But here’s the real question: does the Fed even need to ease again in November? Ultimately, we’re all heading toward the same destination—growth. And with the Fed’s dot plot and SEP now in play for stock market operators, the economic growth trajectory will be the most crucial factor for stocks moving forward.

So here we are, deep in the weeds, recalibrating and dissecting cross-asset correlations like it’s second nature—par for the course at the start of a rate-cutting cycle. And let’s be honest, these last three months have been nothing short of a madhouse, with markets on a hair-trigger, reacting to every whisper of news. But the big question lingering? Can we really lean on history to map the path for equities for the rest of the year? Honestly, I’m not so sure. History feels more like a broken compass than a reliable guide in this wild market environment.

Forex markets

We’re still sticking to the view that USDJPY remains on shaky ground, especially as the US rates curve hints at more cuts ahead, which should throw a wet blanket on any dollar appreciation. But here’s the catch—the economic data has to cooperate, and a drop in equities and oil prices wouldn’t hurt either. Honestly, right now, those signals are not flashing "fire sale" in neon red.

Next up, it's off to see what the ever-muddled BoJ has in store. There's not much intrigue here, though—the market expects them to walk the tightrope given the events of July, keeping policy glued to economic data, especially around inflation and the cautious Japanese consumer. In other words, don’t expect them to shake the trees too much this time.