The Federal Reserve (the Fed) slashed US interest rates by 0.5 percentage points last week, which would usually be a sign that the economy’s in hot water. After all, the standard cut is 0.25 percentage points. But alarm signals haven’t been sounded this time. The unemployment rate has ticked up slightly, sure, but the US hasn’t seen widespread layoffs and the economy still appears robust. In fact, after five rollercoaster years, the US is celebrating a rare trifecta of low inflation, low unemployment, and steady economic growth.
Interest rates have been high enough for long enough to cause damage, a lot of which would only reveal itself after a lag. So the Fed’s chunky cut made it clear that the central bank’s top priority is no longer laser-focused on inflation, but on preventing the economy from losing steam and falling into a recession. That could mean a new era for investors, too, one spent focusing more on the strength of the economy than regular inflation readings.
Next week’s data should provide insight into whether the US economy is still holding firm. The numbers should confirm that the economy has picked up over the last quarter, after two estimates suggesting the same. That said, there could be some worrying undercurrents, like weak manufacturing activity and mounting financial pressure on lower and middle-income consumers.
So keep an eye out for next week’s manufacturing data, orders for long-lasting items like cars and appliances, and consumer confidence reports for hints about the manufacturing industry’s activity levels. Watch out for the annual consumer expenditure survey too that will shed light on how American households have handled high rates and rising costs recently.
On The Calendar
- Monday US global and manufacturing purchasing managers’ index (PMI) (September), UK manufacturing and services PMI (September), Eurozone manufacturing estimated PMI (September).
- Tuesday US consumer confidence (August), US house prices (July), Germany IFO business climate index, Reserve Bank of Australian interest rate decision.
- Wednesday US annual consumer expenditure survey, US new home sales (August), Australian inflation (August). Earnings Micron Technology.
- Thursday US economic growth final number (second quarter), US durable good orders (August), Switzerland’s rate decision. Earnings Accenture, Costco.
- Friday Eurozone economic sentiment (September), France inflation, Germany unemployment rate, Canada economic growth (second quarter), US personal income and outlays survey (August).
What You Might’ve Missed Last Week
US
- The Fed initiated its rate-cutting cycle with a jumbo 0.5 percentage point cut.
- More US borrowers fell behind on their credit card and car loan bills.
Global
- BlackRock and Microsoft formed a fund to invest in AI infrastructure.
UK
- August’s year-over-year inflation of 2.2% was slightly above the Bank of England’s 2% target.
- The Bank of England kept the UK’s key interest rate steady at 5%.
- Consumer giant Reckitt Benckiser held talks with potential buyers of its £6 billion homecare division.
- For the first time in over three years, there are more investors feeling positive than negative about UK stocks.
- Asking prices for UK houses rose at double their long-term average in the four weeks leading up to mid-September.
Why It Matters
The Fed’s bold 0.5 percentage point cut was a sign of confidence the inflation’s tamed, freeing them up to focus on protecting jobs and, as a result, the economy.
Naturally, some have taken the jumbo cut as a sign of trouble. But most investors aren’t sweating it they see this as a return to normal rate levels, not a rescue mission. So confident that the Fed is focused on economic growth, and with lower rates increasing the current value of companies’ future cash flows, investors pushed stocks higher after the news.
Credit card and car loan delinquencies – late or missed payments, essentially – hit their highest levels in a decade this year. Rising interest rates and a higher cost of living have made it tougher for Americans to keep up with their payments. That’s especially true for lower-income borrowers who haven’t reaped the rewards of rising asset prices or higher rates on savings accounts.
BlackRock, Microsoft, and Abu Dhabi’s MGX have formed a fund to invest in AI infrastructure investments like data centres and energy projects. And to line its coffers, the trio are looking to raise $30 billion from private equity investors. Nvidia will also bring its AI expertise to the table, helping build out the necessary data centres and factories. That’s a hot pocket of the market right now. Demand for AI is on a tear, and those super-smart systems burn through a ton of energy. So investments like these are designed to pad out the power infrastructure that fuels the tech, with the hopes of benefiting financially from the AI trend without being directly exposed to the tech companies themselves.
Overall inflation stabilised at 2.2% in August, but services inflation remained high, driven by wages. The Bank of England held interest rates at 5%, signalling a cautious approach toward further reductions, future cuts dependent on when inflationary pressures ease. This has created some optimism in the housing market, where declining mortgage rates and post-election stability have boosted buyer demand, particularly for larger properties.
Corporate activity is also shaping the UK investment landscape, with major companies like Reckitt Benckiser restructuring and more firms being taken off the stock exchange due to acquisitions. While these takeovers offer short-term boosts to share prices, they are shrinking the pool of stocks for investors, raising concerns about the long-term viability of the UK stock market. However, there is some good news for UK stocks for the first time in three years, more investors are bullish on UK stocks than bearish, partly reflecting renewed confidence in sectors like utilities and consumer staples.
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