The Fed will cut rates in the 'four witches' week. What impact on the markets?
In all likelihood, the Federal Reserve will return to cut rates in a few days (on 18 September). Investors are undecided whether the move will be mild (25 basis points) or more aggressive (50 basis points).
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3' min read
After the ECB it is now the turn of the other major central banks. In the financial week from 16 to 20 September, first the US Federal Reserve (18 September), then the Bank of England (Thursday 19) and finally the Bank of Japan (Friday 20) will decide whether to change interest rates. These are genuine market movers that follow last week's decision by the ECB to cut the deposit rate (the rate commercial banks receive for the liquidity parked in the reserve account at the central bank and against which the Euribor interbank index that variable-rate borrowers are familiar) by 25 basis points.
ECB: main refinancing rate from 4.25 % to 3.65 %
The ECB also reduced the main refinancing rate by 60 basis points, from 4.25 % to 3.65 %. This is the rate that banks pay to borrow short-term (one week) amounts from the ECB. Of this cut, 35 basis points had already been announced in a document of 13 March in which precisely this 'technical adjustment' to reduce the difference between the deposit rate and the main refinancing operations rate from 50 to 15 basis points was announced.
For the Fed, two hypotheses
.As for the Federal Reserve, the market is divided, assigning 70% probability to a 25 basis point cut (soft landing style) and 30% probability to a more aggressive 50 basis point cut. The latter would be a partial surprise and could also be misperceived by equities as it could be interpreted as a 'recessionary' cut, symptomatic of the central bank's increased concern about the state of the US economy. We shall see.
As for the Bank of England, the market expects nothing to happen with rates at 5%, as well as for the Bank of Japan at 0.25%. However, in recent weeks, the dollar/yen exchange rate has been moving exceptionally well in anticipation of a more restrictive policy from Japan. Since 11 July, the yen has strengthened by 15% against the greenback, returning to the values of the beginning of the year. This rapid movement prompted many traders to forcibly close carry trades opened over the past two years by those who, borrowing in yen at low rates, then used that liquidity to invest mainly in US dollars in US government bonds or equities in the technology sector. In the week just gone, however, despite the strengthening of the yen, tech stocks led by Nvidia and more generally by the 'magnificent 7' regained their lustre and cancelled out the previous week's decline. The S&P 500 index also moved very well (+4.5%), surpassing 5,600 points and repositioning itself close to all-time highs. European stock exchanges rose somewhat less, partly because they were decidedly less equipped with technology stocks.
Bonds and surroundings
Bonds (with rates falling to their lowest levels of the year for the Eurozone and to their lowest levels since the spring of 2023 for US government bonds) and stock market sectors that are considered proxies for the bond market will be in focus in the coming sessions: real estate and utilities in particular have been running with the wind in their sails on the back of strong bond buying. The market is definitely long (perhaps overbought) in the run-up to the meeting at which the Fed is expected to start reversing monetary policy.
