Market Update - FOMC: Resumption of rate-cut cycle should be accretive to markets

Highlights: As expected, the FOMC voted at its September meeting to cut the federal funds target range by 0.25 per cent to 4.00-4.25 per cent; a first change after 9 months. But while there was only one dissenter calling instead for a 50bp cut, the ‘dots plot’ with the path ahead for rates shows a wide range of views. At the press conference, Fed Chair Powell characterised it as a ‘risk-management cut’ as unemployment is still low and Fed forecasters may not have great confidence. That uncertainty will make incoming data key to the rate outlook and lead to potential two-way volatility. Still, it is clear that cash rates are coming down and locking in quality bond yields is important. The resumption of this gradual easing cycle is also positive for risk assets, and we hold our overweight in US equities due to a resilient US economy, strong earnings growth, AI innovation and re-onshoring. While USD strengthened a bit overnight due to the dispersion in Fed views, tightening rate differentials should continue to weigh on USD and argue for currency diversification.

• We maintain our view of only two more 25bp rate cuts (in December and next March) through end-2026 due to the resilient US economy and still low unemployment. However, the recent deterioration in labour market data is a dovish risk to our view as we may see a little more easing than our forecast. This could possibly come in the form of another 25bp rate cut in October, or simply more easing at some point in 2026. This risk is reflected in the Fed’s new projections, which now see two more cuts this year
• The market reaction was mild, with quick but relatively small swings in both directions, as investors tried to reconcile the constructive view on growth and small upward revision in inflation with the fall in Fed’s rate assessment. As the incoming data will set the rate path, we do not change our current views
• Since 1990, when the Fed resumes its monetary policy easing cycle, US financial markets tend to rally in the subsequent 12-months. Historical data suggest US fixed income rises 7 per cent and US markets rise 22 per cent. US equity markets also outperform the world as the MSCI World Index on average rises 19 per cent and the MSCI World Ex US rises 18 per cent
• With easing underway, resilient earnings in the face of tariffs, and upward earnings revisions, prospects for S&P 500 corporate earnings suggest acceleration over the next six quarters. Therefore, we maintain an overweight US equities stance. The tech revolution led by productivity enhancing AI, nearshoring /onshoring and the reindustrialisation of the US continue to lift growth prospects and valuations
• We maintain a mild overweight US IG credit and prefer medium-to-long duration Treasuries as growth moderates and the Fed eases gradually. We expect the USD to weaken further into year-end as Fed easing contrasts with G10 peers; tariff/geopolitical risks remain a swing factor