How will the market respond to a US rate cut when it finally comes?

WHAT a difference a week makes! Barely six days ago, markets were cruising on the back of a US economy that appeared headed for a soft landing – a narrative that underpinned the bullishness surrounding stocks, and one whose origins could be traced partly to the US Federal Reserve’s communications this year which regularly bordered on the glass being half full.

Wall Street’s major indices this time last week were close to all-time highs and the federal funds futures market was pricing in a 100 per cent chance that the Federal Reserve would cut interest rates at its September meeting – 95 per cent that it would be a 25 basis-point cut and 5 per cent that it would be 50 points.

The release of weak July manufacturing and jobs data last Thursday and Friday (Aug 1, 2) respectively have now upended this happy scenario, and according to the CME FedWatch tool, although the odds of a rate reduction in September are still 100 per cent, the chance of a 50-point cut is now 72 per cent.