Traders return to the drawing board after the Fed's dovish dud

Wednesday’s stock market session was a rollercoaster, swinging wildly as the Federal Reserve delivered a much-anticipated half-percentage-point rate cut. Traders initially cheered the move like it was Christmas morning, but the euphoria quickly fizzled when the Fed hinted they weren’t in any rush to keep slashing rates aggressively. The market, which had already priced in not just the 50-basis-point cut but was eyeing something juicier, got smacked with what can only be described as a dovish dud.

The new dot plot? It promises another 50 bps of easing by year-end (100 bps total, including today’s cut), but with nine Fed officials signalling a cap at 75 bps, it’s like we’re back to square one. Now the pressure is on growth to step up and justify sky-high market valuations. Every major data release until December will feel like a high-stakes economic health check. With inflation fears on the back burner, all eyes will turn to job numbers—the new battleground between the market’s thirst for more cuts and the Fed’s ‘wait-and-see’ stance.

Powell’s move was dubbed an “insurance cut”—just enough to keep things steady but not stoke fears of, “What does the Fed know that we don’t?” Unfortunately, the Fed’s economic visibility hasn’t improved much, and I’m not sure that inspires confidence. Powell wasn’t as dovish as the median 2024 dot plot suggested, emphasizing a cautious, meeting-by-meeting approach, insisting the Fed’s not on a “pre-set course.” But if you ask me, the likely path is a steady 25 bps cut at each meeting until March. A sensible decision met with a measured market response, though tinged with disappointment as the Fed remains data-dependent.

Now, all eyes pivot to the Bank of Japan (BoJ) for Friday’s rate guidance after the recent chaos in the carry trade unwinding. Don’t sleep on the PBoC, either.

The BoJ sent shockwaves through the Tokyo market in July with its second rate hike in four months and hawkish forward guidance that hit like a financial tsunami. Another hike this week is off the table—that much is clear. But Kazuo Ueda has a tightrope to walk. He needs to deliver forward guidance that keeps the notoriously wild-child USDJPY in check, allowing the yen to appreciate on a slow, steady path while avoiding a wealth effect meltdown by toppling local stocks.

China’s property market is suffocating under the weight of deflation, with the ominous shadow of a decade-long recovery looming large. History’s script for housing market collapses around the globe suggests it could take China years to climb out of this bursting bubble—and that’s if property prices even see the light of their pre-crash highs again. The real risk? This deflationary spiral might be deeper and longer-lasting than anyone’s bracing for.