Chhad Aul, Chief Investment Officer and Head of Multi-Asset Solutions, SLGI Asset Management Inc.
- After holding rates at a 23-year high since last July, its rates are now at a range of 4.75% to 5.00%.
- The start of a rate-cutting cycle at this week’s FOMC (Federal Open Market Committee) meeting was well telegraphed, with the only question being the size of the first cut.
- The U.S. Federal Reserve (the Fed) took the more aggressive approach with a 50 basis points (bps) cut, which markets had priced in at roughly a 60% probability.
- In recent communications, the Fed has indicated significant progress on its inflation mandate, with the annual rate of Consumer Price Index (CPI) inflation coming in at 2.5% in August. The focus has moved on to the labour market, where some signs of normalization have begun to appear after several years of tightness. This has brought with it an uptick in the unemployment rate to 4.2%.
- With a 50 bps cut, we don’t believe the Fed is expressing more significant concerns around the labour market or the broader economy – which are both performing reasonably well. This is more an admission by the central bank that with inflation falling, rates are now more restrictive than warranted, allowing for a quicker pace to kick off this easing campaign. Our expectation at this point is that the Fed will move to 25 bps cuts at the remaining meetings this year.
- ? While there have a been a few bouts of volatility in recent months, U.S. stocks continue to show resilience. Importantly, beneath the surface there has been a rotation away from the very narrow leadership of largecap tech stocks to an increase in breadth across different parts of the market that would benefit from falling interest rates, including small caps and dividend-paying stocks. This rotation is healthy for the market, and we are positioned for this to continue.
- We continue to advocate for the movement from cash to high-quality medium-term bonds as the rate-cutting cycle begins. This allows investors to lock in attractive yields while also gaining the diversification benefit of bonds if greater economic risks were to materialize.
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