Market Thoughts – Friday 20th September – Record Highs Once More

Where We Stand – It’s Friday, at the end of a long week, so I shall keep things brief this morning. 

A distinct risk-on vibe dominated markets yesterday, as participants continued to digest the FOMC’s 50bp cut earlier in the week, with said cut providing a fillip to sentiment as the dust continued to settle. Such was the extent of the positive risk mood that the S&P 500 rallied almost 2%, notching its first record close since July, while the Nasdaq gained just shy of 3% on the day. 

The path of least resistance continues to lead higher for the equity market, with the 3 pillars of my year-to-date bull case - strong economic growth, solid earnings growth, and the forceful Fed put - remaining in place. Dips should remain shallow, and continue to be viewed as buying opportunities. Plus, there are, of course, from a momentum perspective, few more bullish signals than a market closing at all-time highs.

In terms of catalysts away from the equity space, the BoE’s latest policy decision was yesterday’s standout event. The MPC kept Bank Rate unchanged, as expected, while also maintaining the pace of quantitative tightening at £100bln worth of gilts over the next year. Guidance was, unsurprisingly, a carbon copy of that issued last time around, with policymakers pledging to take a meeting by meeting approach to deciding the appropriate path of removing policy restriction. The GBP, however, was bid up post-BoE, as cable briefly rose north of the 1.33 figure to fresh highs since March 2022, likely as a result of the 8-1 vote split being marginally more hawkish than markets had expected.

The ‘Old Lady’s’ slow and steady approach to easing, with just one more 25bp cut in November likely this year, should underpin the GBP against most G10 peers for the time being, though one questions how long this relatively hawkish line can hold into 2025, particularly considering the impending significant fiscal tightening in October’s Budget.

Elsewhere, the weekly US jobless claims figures were considerably better than expected, with initial claims printing 219k in the week ending 14^th September, a 4-month low, over the period coinciding with this month’s nonfarm payrolls survey week. I find it tough to square the idea of a 50bp cut, and 4.4% unemployment by year-end, with this sort of data, though only time will tell on that front.

In any case, the greenback was broadly softer on the day against all G10 peers, with the DXY sliding around 0.3%, not helped by a notable rally at the front-end of the Treasury curve, as 2s fell 3bp over the session. That said, the long-end of the curve continued to sell-off, resulting in a second straight day of bear steepening, as the 2s10s spread rose to fresh wides at 13bp.

Overnight, the Bank of Japan left all policy settings unchanged, with rates remaining at 0.25%, in what was a near non-event of a policy decision. Further tightening, however, remains on the table, with a December hike likely providing that the next set of forecasts, due in October, show the BoJ still being on track to achieve its inflation aim.

Look Ahead – A quiet docket awaits today, which I imagine most participants will be rather pleased about.

The latest UK and Canadian retail sales figures are the data highlights – which says it all about how quiet things have the potential to be – with neither likely to materially move markets, or alter the respective central bank outlooks.

Besides those releases, the end of the Fed’s ‘blackout’ period sees non-voting member Harker make scheduled remarks, though other FOMC members could well pop up to voice their opinions throughout the day. ECB President Lagarde is also set to speak, though given that the day ends in a “y”, this shouldn’t come as any surprise.