Overnight – Investors rejoice Fed rate cut, ignore the reasons for it

The S&P500 closed above 5,700 for the first ever overnight, led by tech, rejoicing the Federal Reserve’s move to start its easing cycle with a substantial half percentage point reduction, while ignoring the reasons the Fed made such a significant move

Big tech including Meta, Apple, and Tesla led the broader market higher following the Fed’s decision Wednesday to cut its benchmark rate by 50 basis points to a range of 4.75% to 5%.

Chips were also in the ascendency, led by NVIDIA and Intel, with the latter announcing that it had no intention of selling its majority stake in Mobileye Global.

The September Fed rate cut marked the beginning of an easing cycle that is likely to see rates fall further in the coming months. The Fed said a bulk of policymakers expect two more 25 bps cuts this year, but markets expect more. Citi expects the Fed to cut rates by another 50 bps in its November meeting, but others, however, believe the Fed is more likely to deliver a 25 bps cut should incoming labour market data continue to show a moderate pace of slowing.

The number of Americans filing for first-time unemployment benefits rose by less than anticipated last week, with initial jobless claims coming in at 219,000 in the week ended on Sept. 14, compared with an upwardly revised 231,000 in the prior week. Economists had forecast a consensus figure of 230,000.

History is not on the side of a bullish move after the Fed’s first rate cut was 50bps, with the last 2 occasions seeing the S&P500 fall 39% and 54% over the following 12-18 months and the Fed underestimating the spike in unemployment by half. Both occasions ended in a recession. However, this time the Fed seem to more ahead of the curve than in 2001 & 2007 which may result in a softer landing than previous occasions