Fed hints at rate cuts as AI volatility and PMI rebound shape market amid election buzz

Six rate cuts predicted over the next year

What the chart shows

This chart illustrates implied Fed funds futures probabilities based on CME Group futures pricing. The far-left column marks the day of the FOMC rate decision. The second column shows the implied Fed funds rate on that date. For example, on November 7, 2024, the market expects the Fed Funds rate to be 5.05%. The subsequent columns depict the probabilities of what the Fed funds rate will be at the following FOMC meetings. For instance, the next meeting (July 31, 2024) sees a 93.8% chance that the policy rate will remain the same and a 6.2% chance of a single 25bp cut.

Behind the data

Fed Funds futures have been moving swiftly. The market now predicts a 90% chance of a 25bp cut during the September FOMC meeting​​. Additionally, the market is leaning towards there being three 25bp rate cuts by the end of 2024 and three more by July next year, a sharp contrast to the one rate cut expected a few weeks ago​​. This shift is driven by {{nofollow}}cooling inflation and a {{nofollow}}slowing labor market despite a {{nofollow}}solid GDP report. Upcoming PCE, CPI, and payroll releases will be crucial in determining the extent of rate cuts over the next few months.

Central banks repriced towards dovishness

What the chart shows

This chart depicts the magnitudes of futures-implied policy rate cuts for 2024 and 2025 for selected major central banks amid an early accommodative cycle and their recent and upcoming monetary policy meetings (Fed: August 1, ECB: July 18, BoE: August 1, BoC: July 24).

Behind the data

Developed markets, particularly the US, have made progress in disinflation. Consequently, futures markets have been repricing central banks towards dovishness, implying relatively larger rate-cut repricing. Concurrently, Fed policymakers have signaled that the Fed is moving {{nofollow}}closer to rate cuts. However, due to persistent underlying inflation risks, it is anticipated that {{nofollow}}reductions in the major central banks’ policy interest rates will be gradual. Recent futures pricing (as of July 25, 2024) implies total rate cuts this year for the Fed, ECB, BoE, and BoC to be approximately 70, 85, 57, and 109 bps, respectively. For 2025, futures indicate approximately 97, 75, 81, and 83 bps, respectively. Meanwhile, the ECB and BoC have already lowered their reference rates by 25 and 50 bps this year, respectively.

PMI on the rebound?

What the chart shows:

This chart presents the Purchasing Managers' Indices (PMIs) for the past three years, with green boxes indicating expansion and red boxes indicating contraction. It reveals that emerging markets initially contracted early in the cycle but have since rebounded, whereas developed markets have only recently begun to recover from their contraction phase.

‍Behind the data:

During the central banks' hiking cycle, it is crucial for policymakers and the market to consider the spillover effects of efforts to combat inflation. The impact of these interest rate hikes extends beyond immediate financial adjustments, influencing various sectors of the economy. PMI numbers indicate that these hikes have created significant challenges for both the economy and companies. Increased borrowing costs and tightened financial conditions have slowed down business activities, reduced consumer spending, and strained corporate profitability. This underscores the importance of balancing inflation control with potential negative consequences on economic growth and stability.

Divergent DXY on different presidential election winners

What the chart shows

This chart shows the movements of the USD Index around three months before and after the latest two US elections in 2016 and 2020, in which Trump and Biden won the presidential elections, respectively.

Behind the Data:

The data points to a stronger USD when Trump won in 2016, but a weaker USD after Biden won in 2020, likely due to their differing policies. 

{{nofollow}}Under Trump, tax cuts that enhanced fiscal deficits and imposed tariffs that kept trade and global geopolitical tensions elevated positively influenced the USD Index. 

Under Biden, massive fiscal expenses that weighed on fiscal deficits and less intensity in global supply chain and trade reshoring and deglobalization helped put downward pressure on the USD. 

For the upcoming election later this year, similar policy implications under Trump, currently the favorite, and Biden's successor Harris might yield comparable outcomes for the USD Index.

Strong year for US equities

What the chart shows

This chart displays the number of trading days per year that the market has reached an all-time high. The blue bars represent the total for the entire year, while the green dots indicate historical values up to the current day of the year. Remarkably, this year has already seen the S&P 500 close at an all-time high for 38 days, a feat achieved only four times previously: in 1964, 1995, 1998, and 2021.

‍Behind the data

‍Despite the market's reduced expectations early this year for interest rate cuts in 2024 and the eventful buildup to the upcoming US presidential election, the stock market has shown remarkable strength. It continues to demonstrate resilience and robust performance, suggesting sustained investor confidence and optimism even in the face of potential economic and political uncertainties. This strong market performance highlights the market's capacity to navigate and thrive amidst various challenges, reinforcing its role as a critical driver of economic activity and growth.

Nvidia’s volatility

What the chart shows

The chart illustrates the daily growth of the Magnificent 7 companies using a "beads on a string" format. Each bubble represents the daily growth for a single trading day, calculated as the percentage difference between the opening and closing values. Blue circles indicate days with growth, while red circles indicate days with negative growth.

Behind the data

As Nvidia emerged as a leader of the entire US stock market in 2024 amidst an AI-driven rally, its line depicting daily growth stands out as a notable outlier, showing significant growth on many trading days. Similarly, Alphabet, the parent company of Google, has experienced substantial fluctuations reflecting its volatile market performance throughout the year. Elon Musk’s Tesla started the year relatively stable, with its daily growth line indicating consistent performance initially. However, it has recently tumbled, showing a series of red circles highlighting a period of negative growth. In contrast, Microsoft, Apple, and Amazon are almost invisible on the chart, indicating their daily growth has been relatively minimal and less volatile compared to their peers, suggesting they have been lagging other tech giants in terms of market performance in 2024. Meta's performance, though not as volatile as Nvidia and Alphabet, shows a mixed trend with both positive and negative growth days reflecting the company's varying market response.

2024 and 2023 were the hottest years on record

What the chart shows‍

NOAA calculated the average temperature of the 20^th century from 1901 to 2000, then subtracted the average temperature in each year from this century-long average. This gives us temperature anomalies, indicating how far each year has deviated from the 20th-century mean. Each year is then categorized by how much cooler or hotter it was compared to the average. For example, in 2001, temperatures were 0.6 to 0.7 degrees Celsius hotter than the 1901-2000 average.

Behind the data

The world is hotter than it has ever been before. Both 2023 and 2024 are breaking record temperature anomalies. In 2023, temperatures were 1.38 degrees Celsius hotter than the 20th-century average. Thus far, 2024 is 1.22 degrees Celsius hotter than the 20th-century average. Despite many countries' efforts to cut global greenhouse gas emissions, average global temperatures continue to rise. If the world hopes to limit global warming to the 1.5 degrees Celsius goal set in the 2015 Paris Agreement, immediate and more aggressive actions are needed.