You got to know when to hold them, and know when to fold them

The debate amongst financial journalists has gone from whether it will be 25bp or 50bp, now we know it is 50bp, to why the Fed concluded that the larger cut was necessary. Did the Fed conclude that 25bp would not move the needle either way? Is it possible the economy is not in as good shape as the economists think, and the risk is the employment rate climbs higher, or perhaps the Fed has decided inflation may not be quite at the 2%; however, all the signs are that it’s going to get to the magic 2% so justified a 50bp cut. Whatever, the rational stocks cheered the decision and had a jolly good run on Thursday. Powell told everyone to chill; the Fed was making this decision from a position of strength, and the market happily bought into Mr Powell’s view.

European markets were less impressed by Mercedes-Benz’s profit warning on Thursday. The company cited weaker demand from China for the downgrade to expectations, further evidence that the Chinese economy continues to struggle. US equities seemed less fussed, giving back only a modest portion of Thursday’s gains, despite FedEx falling 15% after they announced disappointing earnings. The dollar barely moved during the week, and the Vix index fell during the week, further evidence that the investment community remains confident in its economic outlook. The soft landing scenario appears to remain the central case.

The market is so far unphased by the increasing tensions in the Middle East as Israel and Hezbollah increase their cross-border attacks. Equity markets tend to react to increases in geopolitical tensions when they directly affect the oil price. So far, WTI remains close to 70 dollars a barrel. If we saw a spike in oil, you would see much more of a risk-off reaction.

In the week ahead, we will get the latest US Prices and Consumer Expenditure index. Both headline PCE and core PCE price indexes are expected to rise by 0.2%, matching the previous month’s increase. Anything worse will reignite the inflation debate. In the coming days, we will also get the flash Purchasing Manager Surveys from around the globe. We will also get the final estimate for Q2 US GDP and the latest durable goods orders.

Aside from the PMIs, there is not much economic data coming from the UK this week. The pound and gilt market have held up pretty well. One has to wonder how the Labour Party’s recent difficulties and the impact on its popularity may influence the October budget. Stocks in Europe look to be starting the week on a solid note, on hopes of further Chinese economic stimulus, and the Bank of China cut short term rates. Lets also hope that Ms Reeves, speaking at todays Labour conference, paints a slightly more upbeat picture than the recent ones.