Markets opened with a sense of uncertainty after the Federal Reserve delivered its first rate cut of the year and signaled a path that could mean more easing to come. The central bank reduced its policy rate and the median of policymakers now anticipates two more cuts this year and another next year. That guidance arrived alongside an unusually wide split of views inside the Fed, with about one third of officials preferring no further easing in 2025 and nearly half forecasting only one more cut or none at all. Market pricing reacted to that internal division and to comments by the Fed chair that emphasized a risk management approach to future decisions.
The Fed decision produced swift swings in both currencies and bonds. The dollar plunged to a multi year low on the initial read, only to rebound as market participants parsed the extent and timing of future cuts. Futures trading now places roughly an 85 percent chance on a further 25 basis point move in October. Over the remainder of the year futures imply only 44 basis points of easing. Those probabilities sit against market expectations that rates could fall below 3 percent next year from a midpoint of 4.125 percent today. The implied terminal rate for the cycle now stands around 2.9 percent, about 35 basis points lower than it was three months ago.
Equities reacted unevenly. The Nasdaq fell 0.32 percent while the S&P 500 slipped 0.1 percent on the Reuters session that followed the Fed announcement. Tech stocks were a prominent influence on the session as one large chipmaker retreated about 3 percent after reports emerged that Chinese regulators had told domestic firms to halt purchases of its AI chips. Chinese officials later said they were open to discussion on the matter. Those reports added to an already complex set of drivers for risk appetite, but futures recovered and were up around one percent as markets factored in easier policy ahead and allowed riskier assets to regain momentum.
Individual corporate developments also weighed. One major software and cloud company rose on speculation it could be involved in a potential deal linked to a popular social media platform. A ride hailing company jumped after news of a partnership with an autonomous vehicle unit. Such headlines can amplify moves in market sectors that are already leading gains or losses and they underscore how company news and macro policy moves can interact on any given trading day.
Central bank activity beyond the United States added further complexity. The Bank of Canada trimmed its policy rate by 25 basis points. Norway cut its main rate by the same amount to 4 percent. Attention then turns to the Bank of England which is widely expected to hold rates steady while updating its controversial approach to reducing the stock of gilts it has on its balance sheet. Unlike most peers, the Bank of England has engaged in active gilt sales and those operations have been blamed by some analysts for lifting long term borrowing costs in the United Kingdom. The Reuters consensus is for the BoE to announce a slowdown in the planned pace of balance sheet reduction to about 67 billion pounds a year, down from 100 billion pounds in each of the prior two years.
Those dynamics have left sterling, British gilts and UK equities sensitive to the central bank conversation. Market participants had priced firmness into gilts before the BoE decision while also watching for any sign that outright sales would be scaled back. The three year program of so called quantitative tightening has already removed more than 300 billion pounds of gilt holdings and the Bank has estimated that the operation might have added only a modest amount to borrowing costs. Not everyone accepts that conclusion, and the debate over the mechanics and optics of balance sheet reduction is likely to stay front and center in London.
Japan presents another point of interest for traders this week. The Bank of Japan is expected to hold rates but to signal the possibility of a hike later in the year. The backdrop for that decision includes softer yen and Japanese government bond yields leading into the meeting and a Nikkei index that has gained about one percent. Political developments also complicate the outlook as leadership changes in the ruling party are in focus ahead of a vote that will choose a new prime minister in October.
China remains a source of both promise and risk for markets. Tech optimism persists, yet the country’s equities have underperformed due to a slide in real estate stocks which acted as a significant drag. The interaction between regulatory reports about chip purchases and the health of the property sector highlights how sector specific developments can ripple through markets when central bank policy is in flux.
On the macro front the Fed framed its decision in part around concern for the labor market. The central bank cited the risk of rising unemployment and noted signs of strain including higher joblessness among Black workers and a declining workweek. Those labor market indicators help explain why the Fed chose to begin easing now even as other central banks are winding down their own cycles.
For traders the immediate agenda is packed. The Bank of England policy decision is timed to provide fresh guidance on both interest rates and gilt sales. In the United States the Philadelphia Fed business survey and weekly jobless claims will add to the labor and regional activity picture. Treasury auctions, TIC flows and a slate of corporate earnings from firms such as a major package carrier, a homebuilder, a restaurant operator and a financial data company are also on the schedule. Geopolitical headlines will be watched closely as well with a planned conversation between two major world leaders later in the week and other high level visits noted on the calendar.
Taken together the current signal from markets and central banks points to a trading session in which policy expectations and headline driven news will matter most. The Fed’s decision to begin cutting was the headline of the week but the details of its projections and the different voices inside the institution will keep markets attentive. Outside the United States the pace of easing, tightening and balance sheet operations varies by country and that mix is likely to be reflected in currencies and long dated yields.
Investors will want to follow the BoE announcement closely and to monitor how futures and fixed income markets interpret central bank language. Tech related headlines out of China and the ongoing patchwork of corporate developments will continue to move sector weightings within equity indexes. For the moment markets appear willing to price in easier policy ahead while also parsing the risks that come with divided policymaker views and an uneven economic picture across regions.
