At the start of this week, futures and swap prices indicated a 92% probability of an interest rate cut in the US. The Federal Reserve (Fed) duly obliged, but the picture moving forward is unclear. Gaps in key data due to the government shutdown have caused uncertainty about the direction of travel.
Inflation is the main concern, but, as we know, this is a variable picture with possible surprises at both ends of the spectrum. President Trump doesn’t believe too much in caution and has lambasted the Chair of the Fed, yet again, as he thinks he should have reduced rates by double the amount.
Despite the threat of inflation and the possible negative impact on bonds, Blackrock like the trade on European bonds and is using currency hedging to bank gains.
As we move towards the end of the year, thoughts naturally reflect on what’s unfolded in the last 12 months, and Trump’s Liberation Day tariffs are certainly one of the main highlights/lowlights, depending upon your point of view.
AI keeps delivering, but the question is for how much longer? Will earnings continue to support valuations? Can data centres continue to be built without huge energy/power infrastructures?
This week’s content:
- Interest rates are cut in the US, as expected… but…
- Weaker US economic data
- Inflation is the number one threat for 2026
- BlackRock likes European bonds
- Access to power is the big threat to AI
- In conclusion
Interest rates are cut in the US, as expected…but…
Although the Fed has reduced rates to a 3-year low, the focus has been on the different opinions within the Fed and the dilemma over whether to prioritise a weakening jobs market or high inflation.
Stocks and bonds rose on the announcement.
The ft reported that three of the dozen voters on the Board objected to the rate cut. This was at odds with Trump’s opinion, as he decried the “deadhead Fed”. “This guy, the head of the Federal Reserve, is a stiff,” Trump said, referring to Powell.
Powell hinted that the bar for further rate cuts in the new year was high, saying after the meeting that interest rates were “now within a broad range of estimates of its neutral value, and we are well positioned to wait to see how the economy evolves”.
Continues…
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