Macro
On Wednesday, the Federal Reserve approved a 0.25 percentage point cut to its benchmark rate, lowering the federal funds range to 4.00%–4.25%, its first reduction in nine months. The move was widely anticipated and reflects growing concern over labour market softness, even as inflation remains elevated. The Federal Open Market Committee voted 11-1 in favour, with Governor Stephen Miran, a recent appointee, dissenting in support of a larger half-point cut.
Governors Michelle Bowman and Christopher Waller, also appointed by President Donald Trump, supported the quarter-point move despite earlier speculation of dissent. In its statement, the Fed said job gains have slowed and downside risks to employment have risen, while inflation remains somewhat elevated. Chair Jerome Powell described the action as a risk management step aimed at balancing slower job growth with persistent price pressures.
The Fed’s dot plot signalled two additional cuts this year, likely at the October and December meetings. A majority of officials now expect the easing cycle to continue, though views remain divided. Most participants foresee one cut in 2026 and another in 2027, as rates gradually approach a long-run neutral level near 3%.
The decision comes amid heightened political tension. President Trump has repeatedly urged faster and deeper rate cuts to revive housing and reduce government borrowing costs, raising questions about central bank independence. Miran’s appointment and prior criticism of Powell have added to the perception of political influence. Separately, a court ruling prevented Trump from removing Governor Lisa Cook, who also voted in favour of the rate cut.
Economic signals remain mixed. While consumer spending and output continue to hold up, unemployment has risen to 4.3%, the highest since 2021, and job creation has stagnated. A recent revision from the Bureau of Labour Statistics showed nearly one million fewer jobs created than previously reported over the past year. Powell said policy is now in a more neutral stance, with officials acting preemptively to support employment while keeping inflation in check.
Rates
Treasuries weakened and the curve steepened, with yields up 2 to 7 bp. The tone was set at Jackson Hole, where Powell signaled cautious dovishness rooted in risk management rather than a shift in the 2% target. He acknowledged a tilt toward labor-market risks while reaffirming price stability, which kept a September cut in play without pre-committing to a steady easing cycle.
The FOMC followed through with a 25 bp cut, the first of the year, while Governor Miran dissented in favor of 50 bp. The statement leaned dovish by emphasizing labor softening, but Powell’s press conference was more restrained, describing the move as risk management and noting there was no broad support for a larger cut. The SEP now implies 75 bp of total easing in 2024, up from 50 bp in June, and trims the projected policy path for 2025 and 2026 by 25 bp each.
Markets priced a slower, shallower cycle. The 2-year yield rose, the 10-year stayed relatively anchored, and the curve steepened. The dots showed a split on additional 2024 cuts, with Miran at the low end into 2025. Inflation near 3% may persist even as expectations remain anchored. On the growth side, economists look for upward revisions to August payrolls, resilient consumption, a modest fiscal tailwind, and easier financial conditions. The base case for the 10-year remains 4.2% to 4.4%.
Debate over Fed independence resurfaced amid political noise. History suggests such tension is normal, and with only one formal dissent this meeting, the institution projects continuity even as views inside the committee remain diverse.
Positioning stays defensive rather than directional. Long duration and 2s–5s steepeners offer protection against growth weakness, policy error, or fiscal strains, while acknowledging that the long end may remain sticky.
Supply will test demand next week: $77B of 2-year notes on Tuesday, $78B of 5-year notes on Wednesday, and $49B of 7-year notes on Thursday.
Credit
Credit spreads have tightened further, reaching the narrowest levels since 1998.
Auctions were firm: the 20-year and 10-year TIPS cleared below expected yields. High grade was active, with AT&T, UBS, and multiple Yankee deals pushing volumes above forecasts. High yield stayed busy; DirecTV priced 1.6 billion, taking the week near 12 billion. Risk premia are at multi-decade lows. Strategists view cuts outside recession as supportive. Net supply remains limited as issuance is mostly refinancing; liquidity is strong; defaults and volatility are low. BNP sees scope for spreads into the 60s; Citi highlights supply scarcity as the key technical.
M&A should add supply into year end after a tariff-related pause, but elevated long-end yields still curb fresh duration. Many issuers favor equity or liability management over gross leverage growth. Leveraged loans remain resilient: maturity walls have been pushed out, carry is attractive versus high yield, and CCCs offer selective value. Private credit competition persists. Bank direct-lending partnerships, such as Citi with Apollo, are scaling, though robust public markets limit private volumes for now. Key watch items: PCE, Fed communications, and upcoming data.
Equities
U.S. equities extended their rally for a third straight week, with the S&P 500 and Nasdaq setting fresh record highs. The S&P 500 gained 1.22%, the Nasdaq climbed 2.21%, the Nasdaq 100 2.22%, and the Dow advanced 1.05%. The small-cap Russell 2000 rose 2.16%, notching its seventh consecutive weekly gain and surpassing its November 2021 record close.
Gains were led by growth and technology-oriented sectors. Communication Services (+3.37%), Technology (+2.10%), and Consumer Discretionary (+1.45%) were the top performers, supported by strength in big tech, including Tesla (+7.6%) and Alphabet (+5.8%), and a sharp rebound in semiconductors (Intel +22.8%). Additional momentum came from Chinese tech, networking and IT equipment, credit cards, investment banks, machinery, and engineering & construction firms.
Meanwhile, several defensives and cyclicals lagged the broader market. Real Estate (+1.43%), Consumer Staples (+1.30%), Industrials (+0.97%), Financials (+0.83%), Materials (+0.91%), Healthcare (+0.72%), Utilities (+0.68%), and Energy (+0.03%) all posted more modest gains.
Underperforming groups included homebuilders, chemicals, financial data providers, and select consumer names such as casual dining (Darden Restaurants -13.1%), auto parts, and cruise lines
Earnings have accounted for most of the S&P 500’s roughly 14% year-to-date total return. With rate expectations and the Fed’s baseline outlook already reflected in market pricing, corporate profits are likely to remain the dominant driver of equity performance. Strategists now project S&P 500 returns of about 2%, 5%, and 8% over the next 3, 6, and 12 months, corresponding to index levels of roughly 6800, 7000, and 7200. This outlook aligns with historical patterns. During past rate-cut cycles with stable growth, equities have delivered a median 12-month gain of around 15%.
Valuations remain above historical averages but are broadly consistent with the current macro and corporate environment. As long-term rates stabilize, earnings should continue to anchor equity gains. An accommodative Fed and an economy that reaccelerates into 2026 should support present multiples, allowing earnings growth of around 7% in both 2025 and 2026 to sustain further upside in U.S. equities. Economists see U.S. real GDP growth improving toward its long-term trend next year. For yields to decline materially, investors would need to become more pessimistic about growth, which would likely hurt corporate earnings more than lower rates would help valuations.
Rate-sensitive segments have benefited from the recent pullback in yields, though further declines in long-end rates appear limited unless economic data weaken. Companies with floating-rate debt remain attractive, while momentum may fade in sectors where lower yields drove recent outperformance, such as homebuilders (slighlty underperformed this week) and biotech. Sector duration exposures are being rebalanced accordingly.
Nvidia announced a $5 billion investment in Intel as part of a partnership to co-develop chips for PCs and data centers. The news weighed on AMD (-0.7%), reflecting concerns over stronger competition. The move is critical for Intel, whose newly established foundry division, now open to external clients after decades of in-house production, has been urgently seeking anchor customers. CEO Pat Gelsinger previously cautioned that without a major external partner, Intel may scale back its plans for advanced manufacturing, which could leave U.S. tech firms more dependent on TSMC for producing cutting-edge chips used in AI servers and smartphones.
In the broader tech space, Alphabet climbed after optimism around Gemini and Nano Banana, becoming the third company to reach a $3 trillion market cap. Apple (+4.9%) rallied on reports of robust iPhone demand and plans to increase output of its base model by 30%. TikTok is set to be sold to Oracle (+5.6%) and a group of U.S. investors, while Oracle is also reportedly negotiating a $20 billion multiyear cloud deal with Meta (+3%).
Elsewhere in semiconductors, sentiment weakened as China launched an anti-dumping probe targeting U.S. analogue chipmakers, pressuring names like Texas Instruments (-1.8%).