It was up for debate this week whether the Federal Reserve would cut interest rates 0.25% or 0.5%. For us, there were three combining factors that allowed them to do the latter and for equity markets to take it so positively. Firstly, retail sales, which grew 0.1% in the month, confirmed to the Fed that the US consumer isn’t overspending or that the economy isnt slowing significantly.

A lower number could have signalled they are behind the curve when it comes to cutting interest rates. Secondly, inflation – last week’s print was perfectly inline, meaning inflation is less of a problem. Chair Jerome Powell commented on this in his speech after the announcement. Finally, and most importantly, the markets had been expecting this level of change.

Yields on US government bonds had moved a long way over the last three weeks. The US 10-year bond started the month at just below 4% and was at 3.6% ahead of the rate announcement. In 2018, the unexpected rate cuts of the Fed shocked markets.  They sought to avoid a repeat this time around. With this in mind, the elections may have been playing a role.

The US elections may also have played a role in encouraging the larger rate cut now. However, even with the independence of the central bank, it is important that markets are fairly well behaved in the run up to November, so as not to bias the voters. While the central bank cannot control the economic data releases for inflation and unemployment, it can provide stability.

Elsewhere, two other central banks held rates. The Bank of England was largely expected to maintain its position, and only had one member vote to cut. Services inflation remains sticky at this current point, held up by wage inflation. In Japan, after raising interest rates in August, the Bank of Japan held them steady, not needing to move again for now.

Where does this leave us? Well, company outlooks since July/August have guided to slowing growth, however economic data has pointed to things moderating back to a normal rate, a positive offset.

We are finally at the start of a monetary easing cycle in the US. If the Fed and other central banks have timed this to perfection, which rarely ever happens, then this should be good for equities and bonds between now and the end of the year. We, of course, know this isn’t so simple and remain conscious that areas of higher valuation may come under pressure with signs of any disappointment. This should be a good backdrop for active asset allocation, so will be monitoring our exposures closely to find opportunities.

Looking ahead

Next week will be all about the forward-looking indicators, as manufacturing and services surveys provide guidance on the outlook across the UK, US and Europe. European inflation data could provide support for further rate cuts by the European Central Bank. A quiter week than this one, but focus will be on the outlooks for business.