The FED cuts rates by 50bpts, the equity markets liked it opting to take a bullish approach as the FED signalled an additional two more cuts this year and lowered the 3-year targeted rate to 2.9%. Perhaps a little too aggressive as some US economic data was inspiring, showing an about face from the previous months reads. Industrial Production on both MoM and YoY reversed steep losses from last month and Manufacturing data bounced back by a similar margin. US Housing data also showed an aggressive read soaring by 9.6% to record the sharpest increase in six months. This could lead to a slight pressure point on prices with potential for the FED to ease back on more cuts. On the US Presidential Election, we have 43 days to go, polls remain tight. Albeit Trumps comments about not rerunning again seem a little odd or even “weird” as Walz remarked. Monetary policy around the world seems to be easing as economies are requiring a little lift. In China the PBOC surprised the market by a cut to its 14-day repo rate which hopefully will provide some stimulus to the much need economy. In Australia on Tuesday, the RBA will deliver its monthly comments on monetary policy. Recent data has been a little soft, business activity in Australia turned contractionary in September as services sector growth slowed and manufacturing activity sank to a 52-month low. Perhaps there is an outside chance of a rate cut although the market is not expecting one until December.

But first, let’s take a deeper dive into the FEDs decision on rates. The decision to cut interest rates by 50 basis points (bpts) has sparked significant reactions across financial markets and the broader economic landscape. Equity markets, in particular, responded favourably to the rate cut, reflecting renewed investor confidence in the Federal Reserve's ability to navigate the U.S. economy through a period of uncertainty. The cut, larger than many had expected, comes as part of a broader strategy by the Fed to support economic growth and stave off a potential downturn. In addition to the immediate 50 bpts cut, the Fed signalled that two more cuts could follow this year, lowering the three-year targeted rate to 2.9%.

This aggressive easing of monetary policy is not without its risks. The concern is that the Fed may be overreacting to short-term economic data, particularly given that recent U.S. economic indicators have shown signs of improvement. Industrial production, for instance, reversed steep losses on both a month-over-month (MoM) and year-over-year (YoY) basis, marking a significant turnaround from the previous months. Manufacturing data also rebounded by a similar margin, providing further evidence that key sectors of the U.S. economy are stabilizing and improving.

Further, the resurgence of the housing market is another important factor that complicates the Fed’s decision-making process. Housing data showed a sharp increase of 9.6%, the largest monthly gain in six months. Housing starts in the United States up from the previous month to an annualized rate of 1.356 million units in August of 2024, firmly above market expectations of 1.31 million units, rebounding from the near 7% plunge in the previous period. This robust growth in the housing sector could lead to upward pressure on home prices, which in turn might reignite inflationary pressures. The Fed must carefully balance the need to support economic growth with the risk of overheating certain sectors, such as housing. If home prices rise too rapidly, the Fed may need to reconsider the pace and magnitude of future rate cuts which is what we anticipate will occur.

Nevertheless, the Fed’s decision to signal additional rate cuts reflects a broader concern about the global economic outlook. Central banks around the world are facing increasing pressure to ease monetary policy as economic growth slows in key regions, including Europe and China. By pre-emptively cutting rates, the Fed is attempting to insulate the U.S. economy from external shocks while maintaining domestic momentum.

The Fed's actions are part of a broader trend of monetary easing across the globe. As economic growth slows in many advanced and emerging markets, central banks are turning to interest rate cuts and other forms of monetary stimulus to prevent a deeper downturn. In China, for instance, the People's Bank of China (PBOC) surprised markets by cutting its 14-day repo rate, a key short-term interest rate that affects liquidity in the financial system. This move is aimed at providing much-needed stimulus to the Chinese economy, which has been grappling with slower industrial output, weakening exports, and a sluggish housing market.

China’s economic slowdown continues unabated. While the Chinese government has also introduced fiscal stimulus measures, such as infrastructure spending and tax cuts, the effects of these policies have been slow to materialize. By cutting interest rates, the PBOC is attempting to lower borrowing costs for businesses and consumers, thereby encouraging more investment and consumption. The hope is that easier monetary conditions will help reignite growth in sectors such as manufacturing, real estate, and retail, which have been underperforming.

However, there are limits to how much the PBOC can ease without risking further destabilization. China’s corporate debt levels remain high, and there are concerns that too much monetary stimulus could lead to asset bubbles, particularly in the real estate market. For now, the PBOC seems willing to take that risk in order to prevent a more severe economic slowdown, but it will need to tread carefully to avoid longer-term financial imbalances and weaker demand that spreads through out other economies especially Australia.

Australia’s economic challenges are multifaceted. The country’s reliance on exports, particularly to China, makes it vulnerable to fluctuations in global demand. As China’s economy has slowed, demand for Australian commodities such as iron ore and coal has weakened, putting pressure on Australia’s trade balance. Domestically, weak consumer spending and a soft labour market have added to the country’s economic woes. This Tuesday we get a peak as to what the RBA is thinking and a remote chance that we get an easing. Expectations for rates to come down in December. 

On Tuesday we have RBA monetary announcement. We expect no change however looking to have some words that potentially lead into a rate cut in December. In the US on the same day, S+P Composite and Manufacturing PMI which are expected to deliver better economic conditions. Then on Wednesday, US Housing data and Australian Monthly CPI Indicator which is expected to show a further softening. Finally on Friday we get Durable Goods orders and GDP. Then on Friday we round the week out with interviews from FED Governor Powel, and chats from Williams, Kugler and Collins. 

On the position front, we have reduced all … positions in equities. We do still feel valuations are too … and expect an economic slowdown, however no point in going completely against the trend. AUDUSD, position is going … together with wheat and … crude position…. 

Trade Focus:

AUD

Fundamentals:

Regardless of the economies globally slowing down and demand for inputs softening the AUD is holding up well. It seems counterintuitive to be … but expect its yielding statues amongst other currencies over the US is helping it along…. 

Technical Analysis:

Technically, we need to see a breach of US… in order to see it into a new and … range. Momentum indicators on a weekly basis look supportive however daily are getting toppy…. 

Support              …

Resistance         …

Momentum        …