- Market participants are almost fully pricing a 25-bps rate cut on Wednesday.
- Experts are predicting at least three Fed rate cuts before the year ends.
- Tesla shares soared after reports that Elon Musk had bought $1 billion worth of the stock.
Equities gained on Monday as market participants eagerly awaited a likely Fed rate cut on Wednesday. However, the outlook for future rate cuts remains uncertain as it will depend on how the Fed views the recent weakness in the US labor market. At the same time, the rally came amid optimism over Tesla stock after Elon Musk’s purchase.
Market participants are almost fully pricing a 25-bps rate cut on Wednesday. Moreover, they expect a more dovish tone from policymakers, especially after recent data pointed to a deteriorating labor market. Since markets have already fully priced a rate cut, it will have little impact on prices. However, messaging on future moves could cause significant volatility.
Fed rate cuts (Source: AMP)
At the moment, experts are predicting at least three rate cuts before the year ends. If policymakers support this outlook or are more dovish, equities will rally. On the other hand, if they remain cautious about inflation and fail to give clues about more rate cuts, prices will pull back.
“The market is counting on sort of a goldilocks scenario where the employment market is just weak enough to prompt the Federal Reserve to start a rate-cutting series, not just one, without disrupting overall growth,” said Carol Schleif, Chief Investment Officer at BMO Family Office. “I think the markets will be disappointed if the Fed doesn’t give some hint that they intend to continue rate cuts.”
Elsewhere, Trump has called on the Fed to deliver a bigger rate cut to support the economy. The government believes the central bank has delayed in lowering borrowing costs. Therefore, to make up for this delay, policymakers should vote for a 50-bps rate cut. Such an outcome would be a surprise that would send equities higher.
Meanwhile, Tesla shares soared on Monday after reports that Elon Musk had bought $1 billion worth of the stock. The news increased confidence among investors, increasing demand for the stock and boosting the S&P 500 index.
Elsewhere, data on Tuesday revealed robust consumer spending in the US, easing worries about the state of the economy. Retail sales rose by 0.6%, beating the estimates of a 0.2% increase. The data showed that other sectors of the economy remained resilient, which could lead policymakers to exercise caution in considering rate cuts.