The Weekender: It's Not Just the First Rate Cut, But the Tempo Ahead

MARKETS

U.S. stocks continued their upward march on Friday afternoon, positioning for robust weekly gains as Wall Street's confidence in a jumbo Fed rate cut gathered steam overnight. In a sharp reversal, traders who had nearly written off the possibility of a significant pivot by the Federal Reserve following recent inflation and jobs data are now rallying around the idea of a 50-basis-point cut. The odds of such a move have surged to 49%, up from just 15% the previous day.

This spike in expectations came after The Wall Street Journal’s Fed insider, Nick Timiraos, hinted that the size of the Fed’s September 18 cut remains a “close call.” Adding fuel to the debate, former New York Fed President Bill Dudley weighed in, saying there’s a “strong case” for a deeper cut.

Whether the WSJ report was a deliberate signal from the Fed remains unclear, but one thing is sure: the decision is now teetering on the edge.

The Fed may be transitioning from a purely data-dependent approach to a more forward-looking strategy, potentially laying the groundwork for preemptive, aggressive cuts to cushion the U.S. economy—especially the softening labour market. These forward "insurance cuts" would allow the Fed to front-run weaker data, a scenario that’s undeniably bullish for global markets, including local bourses.

Even if a 50bps cut doesn’t materialize next week, it will likely remain firmly on the table. And here’s the kicker—if the Fed moves big now, it will be seen as impactful, whereas delaying could mean getting caught in the post-election noise, where political uncertainty and market sentiment collide. Half of the U.S. will be disappointed, and there’s no telling what kind of reaction could follow from either political extreme.

The alternative? If the Fed holds back and the labour market nosedives in the coming months (as many suspect it will), it risks facing a chorus of “I told you so” and “behind the curve” chants from the markets. The Fed has an opportunity to move now—before those egg-on-the-face moments become reality.

The timing of the article is critical here. If there weren't enough votes for a 50bp cut, it’s hard to believe the Fed would have “green-lighted” the piece. After all, it’s unlikely Timiraos would jeopardize his insider status by going rogue. Unlike some more sensational outlets, the WSJ doesn’t deal in clickbait, so the timing feels less like a flippant trial balloon and more like a deliberate move.

I’ve got to admit, though—I’ve got an egg on my face for writing off the 50bp cut, which put me well into chase mode but, fortunately, not into wrong decision mode (i.e., making the Reuters ranges in the wrong direction) as we had been keeping small core dollar shorts vis JPY and EUR.

Even though FedWatch showed a 30% chance on September 11, I noted enough cross-asset noise, primarily through the oil channel, to keep the possibility alive.

There’s still a school of thought that Powell might reach into his monetary hat and pull out a surprise 50-basis-point cut. The call could be closer than the odds are pricing, and Powell might be the wildcard that flips the entire narrative. Buckle up, because this high-stakes game isn’t over yet.

Why the confidence, you ask? Picture this: a central banker with a dual mandate wakes up one morning, checks the data, and sees core inflation trending neatly around the target. Meanwhile, the jobless rate hovers at 4.2%—right near the long-run equilibrium—and it’s inching higher. Now, where would they want interest rates if they were to wipe the slate clean and start fresh? Indeed, it is not 200 + basis points above neutral. They'd probably think, "Hold on, maybe we’re behind the curve."

It’s the kind of moment where the realization hits that inflation is under control, and the labour market is softening just enough to start taking the foot off the monetary brakes. The real question is, if they had to start over, would you start off with a rate cut light or move more decisively toward neutral—or even below it?

FOREX MARKETS

Back in the day, when I was running a big bank FX desk, I always told my new hires not to trade next week’s news—that’s already baked into the price. The natural edge comes from thinking four to eight weeks ahead. On that note, the market hasn’t fully priced in just how dovish the Fed might get in 2024. We’re talking potential back-to-back 50 basis point cuts. By the way this week closed, it sure feels like the market is hedging for at least 125 basis points in cuts this year.

And remember, not all central banks are in rate-cutting mode; if they are, they're nowhere near as dovishly priced as the Fed—case in point: the ECB. For only the second time this cycle, they shaved 25 bps off, bringing the deposit rate down to 3.50%. This was widely expected, but President Lagarde masterfully kept her cards close during the press conference.

Key takeaways? The decision was unanimous—yes, even the hawkish Austrian governor folded—and the “relatively short time” between meetings signals October is out for another cut. So, the euro might stay buoyant, especially if the Fed goes jumbo next week. Still, growth concerns are holding the Euro back. Hence, we must see a pick-up in European economic data.

On the flip side, there’s the Bank of Japan. The BOJ has been gingerly tiptoeing toward normalization. Negative rates are history. They nudged rates up in July, just the second time since 2007, pushing the key lending rate to 0.25%. Yield curve control is yesterday’s story; they’re even trimming JGB purchases. However, inflation is still above target, and real incomes have risen for two months straight. So, while the BOJ isn’t rushing, they’re not done yet. We’re expecting one more hike this year, probably December, with the yen slipping below ¥140 by year-end—the strongest since summer 2023.

In other words, the FX landscape is far from static, and it’s not just about rate cuts. The pace of rate cuts and divergence between the Fed and the BoJ will keep things interesting well into 2025.

OIL MARKETS

A new reality seems to have overtaken the oil market—a future of sustained high prices is looking less certain, at least for now. Global oil participants are caught in a squeeze, with tremors on both the demand and supply fronts. The biggest shock? China, the once-reliable engine of crude demand, appears to be downshifting faster than expected. Weak economic data, combined with the rapid rise of electric vehicles—now over half of new car sales—and an expanding high-speed rail network, are chipping away at gasoline and jet fuel consumption in ways that weren't foreseen.

On the supply side, OPEC+ is throwing its curveballs. Despite its decision on September 5 to push back bringing production online until December, there's a growing sense that this move is merely delaying the inevitable: a glut of oil that could send prices spiralling down. The group's reluctance to flood the market too soon is understandable but also stokes uncertainty. Intra-cartel tensions are running high, with members like Iraq, Kazakhstan, and the UAE consistently breaching quotas. The alliance feels more fragile than ever, and the pressure is mounting—especially if prices continue their downward drift before OPEC+ reconvenes.

While wild price swings are nothing new for the oil market, expecting a near-term snapback feels optimistic, if not fanciful. Future price trends will hinge on whether OPEC+ rethinks its timeline and the scale of unwinding production cuts. But one thing is sure: the road ahead for oil will be bumpy, with plenty of twists yet to come.

NUTS & BOLTS

As it often does, the market has gone all-in, banking on a dovish turn from Jay Powell and the FOMC next week. Traders have piled their chips on a bet that the Fed is poised to start cutting rates aggressively. Yet, when everyone is leaning so heavily in one direction, the risk of being blindsided by a hawkish surprise becomes all too real—a move that could send markets into a tailspin, if only temporarily.

The Fed funds futures market is signalling between 100 and 125 basis points of cuts by the year’s end, with a hefty 250 basis points—10 quarter-point cuts—baked in by the close of 2025. Please make no mistake: next week’s FOMC meeting has the potential to be the most consequential since the Fed embarked on its rate-hiking spree in March 2022. If traders are caught offside, the resulting market turbulence could be fierce.

As the market has priced in these expected cuts, Treasury yields, nominal and real, plummeted from their levels just a month ago. This is already loosening financial conditions, giving consumers an extra jolt of confidence—and spending power—even before the Fed makes its first cut. Case in point: average 30-year mortgage rates have slid nearly an entire percentage point since April, falling from 7.56% to 6.63%, according to Bankrate.com.

If Powell and company deliver the dovish goods, the runway is clear for a softer landing. But if they throw a curveball and hint at more restraint, let’s just say the market might find itself in for a bit of a reality check. In the dance between the Fed and the markets, it’s always worth remembering that when everyone thinks they’ve got the steps figured out, the tune can change.

Yet, the latest labour market and inflation data have done little to clarify the Fed’s rate-cut trajectory. Even if the Fed delivers a surprise half-point cut, the real action will shift to the fixed-income market’s hawk-eye focus on the updated 'dot plot' and every subtle clue in the FOMC’s statement. Jay Powell’s press conference will be a must-watch, as traders will dissect his every word to gauge the pace of cuts moving forward. It’s not just about the first cut; it’s about reading the tempo of what comes next.

RUNNING UPDATE

Oh, what a lousy week for running. It started strong with a great run on Tuesday, but after that? Motivation hit rock bottom, which is so unlike me. Sure, Typhoon Yagi was throwing the weather into chaos, but honestly, that’s no excuse. There’s always a 40-minute window in the middle of a downpour to squeeze in a good run around the village. The real issue? Why is getting better at running so hard? Is it even worth it? That’s the problem when you switch up your training regime—moving from easy-breezy zone 2 to gruelling zone 4 threshold runs and then wondering why you can’t break that elusive 25-minute 5K barrier.

It’s ridiculous because my whole reason for running is 100% about health, relaxation, and enjoyment—not to become a slave to my Garmin’s endurance score. So, today was a much-needed reset run. I went for a leisurely 10K in zone 2 in a light downpour, which was blissful.

The magic of reset runs? The last time I did this, I ran for 30 consecutive days and completed 280 km in the following month. This time, I’ll be content with 15 days and 200 km. Let's see what Monday brings!

SONG OF THE WEEK

It was one of those weeks where everything that could go wrong did. My running was off-kilter, my positions got wrecked thanks to hotter-than-expected CPI data, and to top it off, Notre Dame—favored by four touchdowns—lost to a lowly ranked, mid-conference team. It was like life decided to throw a perfect storm of disappointments my way. When things pile up like that, it’s hard not to feel like you’re stuck in some cruel cosmic joke.

But here’s the kicker: as I was grinding through my 10 km run, feeling the weight of the week on my shoulders, "Walk of Life" by Dire Straits randomly came on. And at that moment, I couldn’t help but laugh at the absurdity of it all. It was as if the universe was saying, “Hey, it’s just a game, it’s just a bad run, and it’s just another day.” So, I laughed and ran all the way home, reminding myself that sometimes the best way to handle a rough week is to let the music play and keep moving forward.