Morning Bid: Markets to Fed: We’ll take five to go, please

Global markets are extending rallies, with Asian equities, particularly tech, reaching record highs, fueled by expectations of a dovish Federal Reserve. Despite slightly firm US CPI data, analysts anticipate a 25 basis point Fed rate cut next week, with futures pricing in significant easing through 2024. This outlook has already driven down 10-year Treasury yields, boosting liquidity and risk-on sentiment globally, while the dollar shows mixed performance, weakening against certain crosses despite overall resilience.

Analysis

Global equity markets are extending a broad-based rally, driven by strong expectations of an imminent Federal Reserve easing cycle. Despite a firmer U.S. CPI reading, benign underlying components have led analysts to revise core PCE forecasts downward, solidifying market consensus for a 25 basis point rate cut next week. Futures markets have aggressively priced in further dovish action, anticipating 71 bps of cuts by year-end and a total of 125 bps by July 2024. This forward guidance has already impacted the bond market, with 10-year Treasury yields declining approximately 20 basis points in the past two weeks, effectively pre-empting a rate cut. The resulting increase in liquidity is fueling risk-on sentiment, with technology and AI-related stocks leading gains. Asian markets have seen significant appreciation, with indices in Japan, South Korea, and Taiwan reaching record highs, and the Kospi alone posting a nearly 6% gain for the week. In currency markets, the U.S. dollar index has remained relatively resilient, but has weakened against specific crosses like the Australian dollar and Norwegian crown, which have reached 10-month and early-2023 highs, respectively, supported by a favorable yield spread shift of around 40 basis points.

Key Decisions for Investors

• Consider maintaining a pro-risk stance with a focus on technology and AI-related equities, which are the primary beneficiaries of the liquidity-driven rally fueled by dovish Federal Reserve expectations.
• Investors should monitor for tactical opportunities in foreign exchange, particularly going long currencies like the Australian dollar and Norwegian crown against the US dollar, given their favorable yield spread momentum and technical breakouts.
• While the outlook is bullish, it is prudent to watch upcoming Fed guidance closely, as the rally's sustainability hinges on Chair Powell validating the market's aggressive pricing of a prolonged easing cycle.
• Pay close attention to forthcoming European inflation data and U.S. consumer sentiment figures, as these could introduce volatility and influence the Fed's ultimate policy path.