An "insurance" interest rate cut by the Federal Reserve this week adds to a rapidly expanding global money supply and should bode well for activity level and cyclical stocks, according to analysts at Barclays.
In a note to clients, the analysts led by Emmanuel Cau flagged that possible weakness in the U.S. dollar due to the Fed’s reduction should prove to be "bullish" for risk assets, especially emerging market equities.
"With equities near the highs and rates markets still pricing in [roughly five] additional cuts over the next year, further support for equities will hinge more on robust incoming macro[economic] data than on more dovishness in rates," the analysts wrote.
The comments come after the Fed slashed interest rates as expected on Wednesday, bringing down borrowing costs by a quarter point to a target range of 4% to 4.25%, and indicated that two more cuts may be coming in October and December.
Fed Chair Jerome Powell Powell described the reduction as a form of "risk management," as the central bank looks to balance the twin pressures of a softening labor market and sticky inflation.
But Powell signalled that recently weak jobs data is playing heavily into officials’ thinking, arguing that "downside risks to employment have risen." An acceleration in inflation, on the other hand, was seen as a more temporary challenge.
In theory, decreased interest rates can encourage investment and hiring, albeit at the risk of driving up inflationary pressures.
Crucially, the Fed’s announcement included fresh projections which showed that officials are anticipating another half percentage point in rate cuts by the end of 2025.
Should these come to pass, it would leave borrowing costs at a range of 3.5% to 3.75% -- a decline from the level previously seen by policymakers when the last outlook was released in June.
However, seven of the 19 estimates forecast fewer drawdowns this year, with one even calling for rates to have stayed at their prior band of 4.25% to 4.5% for the remainder of 2025. This means that debate could be fierce heading into the next Fed meetings in October and December.
"[T]hese insurance Fed cuts will continue to boost liquidity impulse further, with global money supply (i.e U.S., European Union and China combined) already rising faster than GDP amid the broader easing in financial conditions," the Barclays analysts wrote.
"Improving credit impulse augurs well for activity in general, as seen by the recent pick-up in purchasing managers’ indices."
They noted that this is "why we turned more constructive on the short cycle space few weeks backs, adding to cyclicals via capital goods and cutting defensives via utilities."
Investors should watch flash PMI readings due out next week for "further evidence of this trend," they said.
Source :
https://www.investing.com/news/stock-market-news/feds-insurance-rate-cut-adds-to-global-liquidity-feast-barclays-says-4246318
