Wall Street: US equities boosted by anticipation of a supersized FOMC rate cut

Global markets rally ahead of FOMC meeting

US equities finished last week on a high, boosted by hopes for a 50 basis points (bp) interest rate cut at this week's Federal Open Market Committee (FOMC) meeting and as the Michigan consumer sentiment index rebounded to its highest level since May. For the week, the Nasdaq 100 soared by 5.9%, while the S&P 500 and Dow Jones gained 4% and 2.6%, respectively.

Potential political shockwave: Trump assassination attempt

The new week has started with reports of a possible second attempted assassination on the life of Republican presidential candidate Donald Trump. A man with an AK-47 style rifle was spotted in bushes about 300 to 500 yards from Trump while he was golfing. The man was later stopped and apprehended after he tried to flee the scene. At this point, both financial and betting markets appear unruffled.

Anticipation builds for a major rate cut

Returning to Friday night’s action, the odds of a 50 bp rate cut at this week's FOMC meeting have risen to above 50%, fuelled by an article quoting former New York Federal Reserve (Fed) President Dudley, who argued there is "a strong case for 50" regarding the Fed's potential move. This view was supported by former Fed economist Sahm, who pointed to progress on inflation control and a cooling labour market as the basis for a larger aggressive cut. These articles followed a news report on Thursday that revealed policymakers were debating between a 25 bp or 50 bp cut.

As a side note, ahead of the 18 September FOMC meeting, it will be seventeen years to the day that the Fed cut rates by 50 bp in 2007. In 2007, there were approximately 446 days between the Fed's last hike and its first rate cut. This time around, there will be approximately 419 days between the Fed's first cut and its last hike on 26 July 2023.

What is expected from this week’s FOMC interest rate meeting?

Date: Thursday, 19 September at 4.00am AEST

At its last meeting in July, the FOMC kept rates unchanged at 5.25%–5.50%, as widely expected. Following a run of cooler inflation and labour market data, Fed Chair Powell sounded dovish. He indicated that the Fed's confidence level is increasing, that inflation is returning to target, and laid the groundwork for a September rate cut.

As noted above, the debate ahead of this week's FOMC meeting revolves around the size of the Fed's first rate cut. Reflecting this uncertainty, the rates market is currently pricing in 36 bp of rate cuts for September.

Watch for the Fed’s dots, Summary of Economic Projections (SEP), to show a shift to three 25 bp rate cuts this year from one, and for the Fed chair to signal the size and magnitude of additional rate cuts will be based on incoming data.

Fed Funds rate chart

Source: Federal Reserve Bank of St. Louis Source: Federal Reserve Bank of St. Louis

Nasdaq 100 technical analysis

The Nasdaq's impressive rebound last week took it above our bearish reassessment level highlighted in last week's update at 19,450 to be eyeing downtrend resistance at 19,620, which comes from the July high of 20,690.

A sustained break of 19,620 would signal that the correction from the 20,690 high is complete and that the uptrend has resumed towards 20,690 and then 21,500. Conversely, rejection from the 19,620 level would warn that the correction continues and set for another leg lower towards the 200-day moving average at 18,200.

Nasdaq 100 cash daily chart

Source: TradingView Source: TradingView

S&P 500 technical analysis

Last week's rebound in the S&P 500 was contrary to expectations and took the index to within eyesight of horizontal resistance at 5650/70, coming from the record 5669 high in mid-July.

The price action from here will be critical. Should it see a sustained break above resistance at around 5650/70 post-Thursday's FOMC meeting, it opens the way for a push towards 5800. Conversely, should the S&P 500 find rejection from the 5650/70 resistance area, it warns that the correction from the 5669 high is set to extend lower towards the 200-day moving average at 5200.

S&P 500 daily chart