Wall Street jumps, Tesla gets China boost

After coming into the year forecasting six or more cuts to rates this year, traders are now placing many bets on just one, according to data from CME Group.

When the Federal Reserve announces its latest policy decision on Wednesday, no one expects it to move its main interest rate, which is sitting at its highest level since 2001. Instead, the hope is that the central bank could offer some clues about when the first cut to rates could come.

This week’s Fed meeting won’t include the publication of forecasts by Fed officials about where they see rates heading in upcoming years. The last such set of forecasts, released in March, showed the typical Fed official at the time was penciling in three cuts for 2024.

But Fed Chair Jerome Powell could offer more colour in his press conference following the central bank’s decision. He suggested earlier this month that rates may stay high for longer because the Fed is waiting for more evidence that inflation is heading sustainably down toward its 2 per cent target.

A consequential report hitting Wall Street on Friday could shift policy makers’ outlook even more. Economists expect Friday’s jobs report to show that hiring by US employers cooled in April and that growth in workers’ wages held relatively steady.

Wall Street is in an awkward position, where the hope is that the job market remains strong enough to help the economy avoid a recession but not so strong that it feeds upward pressure into inflation.

Because inflation has been hotter than forecast and because the economy has remained so resilient, economists at BNP Paribas recently pushed out their forecast for when the Fed’s first rate cut could come.

Loading

They had been forecasting a July cut, but they said punting to September may prove to be uncomfortably close to the US presidential election in November. So they’re now calling for the Fed to make its first cut in December.

Not only would the Fed want to avoid looking like it wants to affect the election’s outcome, the November election could also result in significant changes in policy that affect where the economy and inflation are heading, according to the BNP Paribas team, led by Andy Schneider.

“Even if the economy evolves so as to justify a cut by September, we think these risks likely outweigh whatever marginal economic benefits might come from” cutting just ahead of the election, they said.

A large part of the rally to records for US stocks since late October was built on expectations for coming cuts to interest rates, which relax the pressure on the economy and typically goose prices for investments. If they don’t arrive, the stock market could feel even more downward pressure.

In markets abroad, Japan’s stock market was closed for a holiday. But the Japanese yen continues to swing sharply. It has fallen back to where it was against the US dollar in 1990. The sharp drop has raised speculation about whether Japanese officials will make moves to prop up the yen. The Bank of Japan left its main interest rate alone on Friday.

In other markets, stock indexes rose across much of Asia while remaining mixed in Europe.

In the bond market, the yield on the 10-year Treasury slipped to 4.62 per cent from 4.67 per cent late Friday.