Tech Stocks Rally Ahead of Rate Cuts

The Federal Reserve is likely to begin the easing cycle with 25 basis-point cut in September, followed by deeper cuts later in the year.
The Fed’s interest rate decisions would be influenced by employment and inflation data.
Volatility in the stock market is likely to remain elevated as rate cut expectations fluctuate.

Rate Cuts Expectations Drive Market Sentiment

Friday brings little in the way of major economic data, keeping the spotlight firmly on the U.S. Federal Reserve and its anticipated interest rate cuts. On Friday the probability of a 50-basis-point rate cut has risen to 41%, up from 28% earlier during Asian trading.

There are no scheduled speeches from central bank officials, as the Fed is currently in its blackout period ahead of its policy announcement on the 18 ^th of September, where no significant policy changes are anticipated.

There has been growing uncertainty in regard to the size and pace of interest rate cuts triggering wild swings in equity markets. While the narrative had settled around a 25-basis-point after the release of the inflation report on Wednesday, on Friday the possibility of 50 basis-point is back on the table.

Anticipated September Interest Rate Cut

We are expecting the Federal Reserve to begin cautiously its first interest rate cut at its September 2024 meeting. According to the CME FedWatch Tool the market is currently pricing in a 59% probability of a 25 basis-point reduction in borrowing costs next week, which will bring the federal funds rate down to 5.00%-5.25%.

This would mark the beginning of a more gradual approach, with the potential for one or two larger 50-basis-point cuts during the November and December meetings. By the end of 2024, this would bring the benchmark rate to a range of 4% to 4.25%, a level still considered restrictive but less so than current rates.

September cut: 25 basis points
November & December cuts: 50 basis points
End-year target: 4% to 4.25%

Gradual Approach Supported by Recent Inflation Data

We lean toward a more gradual approach by the Fed despite mixed influential economic data. The latest inflation report showed that core CPI which strips out volatile items like food and fuel accelerated slightly in August, diminishing the likelihood of a larger 50-basis-point cut in September.

On the other hand, the latest nonfarm payroll report revealed lower-than-expected job growth in August, with fewer jobs added than anticipated, although the unemployment rate aligned with forecasts at 4.2%. This mixed economic picture gives the Fed room to adjust policy cautiously.

Inflation: Core prices rose more than expected
Employment: Slower job growth but stable unemployment

Implications for Investors

Investors are keeping a close eye on the upcoming quarterly economic projections from the Federal Reserve, as they will offer more clarity on the potential trajectory of interest rates through the end of the year. Market sentiment remains cautious and smaller-than-expected rate cut could trigger an initial disappointment among investors.

Source: TradingView

Stock Market Volatility Mirrors Rate Cuts Uncertainty

Over the past three months the stock market has experienced considerable volatility in anticipation of the Fed’s decision. Major stock indices have pulled back, with tech shares showing particularly sharp movements.

Despite the lingering uncertainty regarding the pace and size of the upcoming rate cuts, the tech heavy index appears ready to resume its up trend. A break above the minor down trend line from the July 2024 peak appears imminent and could trigger an impulsive rally to new record highs in the months ahead.

Conclusion

As the Federal Reserve prepares to implement its first rate cut, the central bank’s interest rates decisions are going to impact the future stock market direction. While the initial cut in September is expected to be modest, further deeper reductions later in the year could provide more relief for businesses and consumers. Investors will continue to monitor economic data closely as the Fed juggles with this delicate balancing act of monetary policy adjustments.

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