By 
In the United States, the stock market is experiencing the opposite of last week's performance. The Nasdaq has bounced back, rising 5.4% over four sessions after losing 5.9% last week. Similar, though less pronounced, trends are seen in the S&P500 and Dow Jones. Investors remain on a volatile ride, swinging between optimism and renewed concerns over the economy. Just yesterday, it seemed widely accepted that the Federal Reserve would lower rates by a quarter point during its September 18 decision, with everyone feeling relatively comfortable. Yet this morning, unexpectedly, the camp favoring a half-point rate cut surged into prominence. The CME's FedWatch tool, which predicts rate changes based on futures contracts, now suggests a 45% chance of a larger rate cut, compared to just 14% the previous day. With such rapid shifts in expectations, it’s hard to say where we’re headed.
As for the European Central Bank, the much-dreaded surprises didn’t materialize. No unexpected rate hikes from Christine Lagarde or any startling remarks from Isabel Schnabel. The ECB proceeded with the anticipated rate cut, allowing European equity markets to continue their upward trend. On a side note, the luxury goods sector has only had one positive session in the last ten trading days—an event not seen since November 2018. While the market has ceased its aggressive punishment of AI stocks, it remains hesitant toward luxury.
You might wonder: "Why does it matter if US rates fall by a little or a bit more?" It’s crucial because a rate cut reduces the cost of borrowing, which should boost the economy. It also signals the central bank's policy direction and how fast it plans to adjust rates. A quicker-than-expected cut might indicate cheaper money flowing into the economy, but if the cuts come too rapidly, it could signal panic and undermine confidence. The Fed, therefore, has to carefully balance the pace of rate cuts to support both the economy and market sentiment.
What triggered the sudden shift in forecasts last night? It wasn’t producer prices or the latest jobless claims. Those indicators confirmed that inflation is easing and the labor market is softening but holding steady. The real jolt came from a combination of events. First, an article in The Wall Street Journal, published around 7:00 p.m. New York time, suggested that while a rate cut is expected next week, its size is still up for debate. Written by Nick Timiraos, a well-respected reporter often seen as having insider insights into central bankers' thinking, his words carry weight. Shortly after, Colby Smith of the Financial Times echoed a similar sentiment. Then, former New York Fed President Bill Dudley chimed in, arguing that a half-point cut would be ideal. As he's no longer a Fed member, he’s not bound by the institution’s "silent period," which began on September 7 and will end on September 19.
In summary, investors have been reassured but not caught off guard by the ECB's decision. While the Fed’s rate cut is certain, the debate now revolves around its size. Meanwhile, stock markets are climbing, as they generally respond well to cheaper money—so long as the economy stays intact as Jerome Powell, Christine Lagarde, and their peers navigate these high-stakes monetary decisions.
In the Asia-Pacific region, Japan ended the week down 0.8%, marking its second consecutive week of losses. Chinese markets are holding steady after hitting their lowest levels since 2019, while the Hang Seng has recovered 1% and is now positive for the year. South Korea and India posted slight declines, while Australia ended the week higher with modest gains.
As for the European Central Bank, the much-dreaded surprises didn’t materialize. No unexpected rate hikes from Christine Lagarde or any startling remarks from Isabel Schnabel. The ECB proceeded with the anticipated rate cut, allowing European equity markets to continue their upward trend. On a side note, the luxury goods sector has only had one positive session in the last ten trading days—an event not seen since November 2018. While the market has ceased its aggressive punishment of AI stocks, it remains hesitant toward luxury.
You might wonder: "Why does it matter if US rates fall by a little or a bit more?" It’s crucial because a rate cut reduces the cost of borrowing, which should boost the economy. It also signals the central bank's policy direction and how fast it plans to adjust rates. A quicker-than-expected cut might indicate cheaper money flowing into the economy, but if the cuts come too rapidly, it could signal panic and undermine confidence. The Fed, therefore, has to carefully balance the pace of rate cuts to support both the economy and market sentiment.
What triggered the sudden shift in forecasts last night? It wasn’t producer prices or the latest jobless claims. Those indicators confirmed that inflation is easing and the labor market is softening but holding steady. The real jolt came from a combination of events. First, an article in The Wall Street Journal, published around 7:00 p.m. New York time, suggested that while a rate cut is expected next week, its size is still up for debate. Written by Nick Timiraos, a well-respected reporter often seen as having insider insights into central bankers' thinking, his words carry weight. Shortly after, Colby Smith of the Financial Times echoed a similar sentiment. Then, former New York Fed President Bill Dudley chimed in, arguing that a half-point cut would be ideal. As he's no longer a Fed member, he’s not bound by the institution’s "silent period," which began on September 7 and will end on September 19.
In summary, investors have been reassured but not caught off guard by the ECB's decision. While the Fed’s rate cut is certain, the debate now revolves around its size. Meanwhile, stock markets are climbing, as they generally respond well to cheaper money—so long as the economy stays intact as Jerome Powell, Christine Lagarde, and their peers navigate these high-stakes monetary decisions.
In the Asia-Pacific region, Japan ended the week down 0.8%, marking its second consecutive week of losses. Chinese markets are holding steady after hitting their lowest levels since 2019, while the Hang Seng has recovered 1% and is now positive for the year. South Korea and India posted slight declines, while Australia ended the week higher with modest gains.
Today's economic highlights
Investors will be particularly interested in the first reading of the US consumer confidence index provided by the University of Michigan (10:00 a.m.). Full agenda here.
The dollar is worth EUR 0.9017 and GBP 0.7618. The ounce of gold remains firm at USD 2,570. Oil is up, with North Sea Brent at USD 72.66 a barrel and US light crude WTI at USD 69.05. The yield on 10-year US debt is at 3.64%. Bitcoin is trading just under USD 57,900.
In corporate news:
- Adobe - The Photoshop maker announced Thursday that it anticipates earnings for the current quarter to be below analysts' expectations, due to increased competition and weak demand for its editing tools. The stock is down 8.5% in pre-market trading.
- Amazon, Walmart - An investigation by Indian competition authorities shows that Amazon and Flipkart, a Walmart subsidiary, violated local competition laws by favoring certain sellers on their e-commerce platforms, according to documents reviewed by Reuters.
- Apollo - Wells Fargo initiated coverage of the stock with an "overweight" rating and a price target of $132.
- Boeing - Boeing shares are down 3.4% in pre-market trading after workers at the American aircraft manufacturer's West Coast facilities, where its main factories are located, overwhelmingly voted Thursday in favor of a strike to demand wage increases, halting production as the company struggles to meet deadlines.
- Moderna is down 4% in pre-market trading after Jefferies downgraded its recommendation on the pharmaceutical company from "buy" to "hold."
Analyst recommendations:
- Adobe: Bernstein maintains its outperform recommendation and reduces the target price from USD 660 to USD 644.
- Dow: JP Morgan maintains its overweight recommendation and reduces the target price from 60 to USD 55.
- Equifax: Barclays maintains its overweight recommendation and raises the target price from USD 300 to USD 380.
- Fair Isaac Corporation: Barclays maintains its overweight recommendation and raises the target price from 1800 to USD 2150.
- Fortinet: Citigroup remains neutral with a price target raised from USD 66 to USD 76.
- Guidewire Software: Baptista Research maintains its underperform recommendation and raises the target price from USD 136.60 to USD 175.20.
- Halliburton: RBC Capital downgrades to sector perform from outperform with a price target reduced from USD 44 to USD 37.
- Kinder Morgan: Barclays maintains its equalweight recommendation and raises the target price from 21 to USD 22.
- LyondellBasell Industries: JP Morgan maintains its overweight recommendation and reduces the target price from 113 to USD 110.
- McDonald's: Citigroup remains neutral with a price target raised from USD 275 to USD 301.
- Moderna: Citigroup remains outperform with a price target reduced from USD 125 to USD 96.
- Moody's: Barclays maintains its overweight recommendation and raises the target price from USD 500 to USD 570.
- Oracle: DZ Bank AG Research maintains its buy recommendation and raises the target price from USD 155 to USD 172.
- Prudential: BNP Paribas Exane maintains its outperform rating and raises the target price from 880 to GBX 900.
- Rentokil Initial: Stifel downgrades to hold from buy and reduces the target price from GBX 570 to GBX 420.
- S&P Global: Barclays maintains its overweight recommendation and raises the target price from USD 550 to USD 610.
- Science Applications International: Baptista Research maintains its hold recommendation with a price target raised from 133.70 to USD 142.40.
- Smartsheet: Baptista Research maintains its hold recommendation with a price target raised from 54.50 to USD 57.40.
- TransUnion: Barclays maintains its equalweight recommendation and raises the target price from 80 to USD 105.
- Verisk Analytics: Barclays maintains its overweight recommendation and raises the target price from USD 275 to USD 310.
