U.S. bond yields were mixed, with the yield curve steepening to its highest level since May 2022. Equity markets rose. Gold, oil, and Bitcoin posted strong gains, driven by recent rate cuts.

U.S. bond yields displayed a mixed pattern over the week, with short-term yields posting a modest decline, while long-term yields increased. As a result, the yield curve steepened significantly, reaching its highest level since May 2022. The 10-year Treasury yield rose to 3.744%, while the 2-year yield settled at 3.614%.

Equity markets posted solid gains, with small-cap stocks outperforming large-caps, advancing 2.20% and 1.35% respectively. The "Magnificent 7" stocks performed especially well, climbing nearly 3%. This positive momentum was largely fuelled by the Federal Reserve’s interest rate cut on September 18.

The U.S. dollar weakened against the euro, with the exchange rate reaching 0.8952. Meanwhile, WTI crude oil prices surged, buoyed by the rate cut, which typically stimulates economic activity and increases energy demand. A drop in oil inventories also contributed to the rally. Gold prices reached record highs, posting their two strongest weeks since April. Lower interest rates reduced the opportunity cost of holding non-yielding assets like gold and pressured the dollar, making the precious metal more attractive to investors holding other currencies. In the cryptocurrency market, Bitcoin rose by just over 8%.

The Fed cut rates to 4.75%-5%, with further reductions planned. August saw strong retail sales and industrial production, while housing market recovery may be delayed until 2025.

The Federal Reserve's 50 bp rate cut to 4.75%-5% was in line with market expectations, aiming for a neutral stance and addressing recession risks, with further reductions projected through 2026. Market expectations suggest the rate may drop to 2.9% sooner than forecasted. In August, US retail sales rose by 0.1%, exceeding expectations, and industrial production increased by 0.8%, driven by motor vehicle production despite a revised July decline. The housing market showed signs of stabilization with a rebound in housing starts and building permits, although existing home sales fell 2.5% MoM and 4.22% YoY. The increase in housing inventory and lower mortgage rates could support future growth, but a market recovery is expected to be delayed until 2025.

The Fed cut rates by 50 basis points to 4.75%-5%, aiming for a neutral stance and addressing recession risks, with further cuts projected through 2026.

The Fed has enacted a 50 bp reduction in interest rates, adjusting the policy rate to a range of 4.75%-5%. This measure is part of a broader strategy to quickly return to a neutral monetary stance and mitigate recession risks, which have been heightened by mounting concerns in the labour market, even as core inflation remains steady at 3.2% YoY. Future projections anticipate additional reductions of 50 bp by the end of 2024, 100 bp in 2025, and another 50 bp in 2026, aiming for a policy rate range of 2.5-3.5%. Market sentiment suggests a more aggressive path, with expectations that the federal funds rate may reach 2.9% a year ahead of the Fed's current forecast. The Fed also continues to project 2% GDP growth and anticipates a rise in the unemployment rate to 4.4% by the end of the year.

In his address, Chairman Powell highlighted that the labour market has cooled from its previously overheated state. He indicated that if the recent employment data had been available in July, the Fed might have implemented rate cuts at that time. Powell underscored the resilience of consumer spending and the strength of GDP growth, noting that there is no immediate recession risk. He clarified that the recent 50 bp rate cut should not be seen as a new standard, as future rate adjustments will depend on evolving economic conditions, including inflation and growth. The Fed may adjust the pace of rate cuts or pause them as needed. Although inflation has moderated, it remains above the Fed's target, and despite stable long-term inflation expectations, the Fed has not declared victory over inflation.

We now expect two additional 25 bp rate cuts this year. We also think zero or negative interest rates are unlikely to return.

US retail sales rose 0.1%, exceeding expectations. July's figures were revised up, indicating consumer resilience. A weakening labour market may slow future spending.

US retail sales in August exceeded expectations, showing a monthly increase of 0.1% compared to a forecasted decline of 0.2%. Additionally, the growth rate for July was revised upwards to 1.1% from the initial estimate of 1.0%. The control group, which excludes volatile items and provides a clearer picture of overall consumer spending, increased by 0.3% as anticipated, with July's growth rate revised upward by 0.1 percentage points to 0.4%. This data indicates continued consumer resilience.

Looking ahead, we anticipate that a weakening labour market may result in a slowdown in consumer spending, potentially leading to some negative retail sales data in the latter half of the year.

Industrial production rose 0.8% in August, surpassing forecasts. Despite a revised July decline, August's gains, driven by motor vehicle production, suggest ongoing sector volatility amid global economic weakness.

Industrial production experienced a significant rebound in August, surpassing expectations with a 0.8% MoM increase, compared to the forecasted 0.2%. Despite a revision of the July contraction to -0.9% from the previously reported -0.6%, the overall performance remained robust. This positive outcome was influenced by the disruptions caused by Hurricane Beryl in July, followed by a stronger report in August. Yearly, industrial production remained stable. The manufacturing sector saw a notable 0.9% MoM increase, lifting the yearly growth to 0.2%. Most major market groups recorded gains in August, with notable contributions from increased motor vehicle and parts production. The consumer goods index rose by 0.7%, driven by a 10.5% increase in the automotive products index, which offset a minor decline in the consumer nondurable goods index.

Looking ahead, we anticipate continued volatility in the sector during the second half of the year, primarily due to reduced demand for industrial products stemming from economic weakness among major global powers.

In August, housing starts and building permits rebounded, signalling potential stabilization. Existing home sales fell short of expectations, but lower mortgage rates and increased inventory suggest future growth.

Housing starts rebounded from their lowest level since May 2020, driven by a notable 16% increase in single-family starts. Single-family permits, a key indicator of future activity, also showed signs of recovery, though they remain 6% below their peak for 2024. This uptick follows several months of decline, suggesting potential stabilization in permits. The report reflects an improvement in homebuilder sentiment, which recovered after hitting its lowest point since December 2023 last month, amidst high mortgage rates. With anticipated Fed rate cuts likely leading to a gradual decline in mortgage rates, both buyer interest and builder sentiment are expected to strengthen further, potentially supporting sustained housing starts and permits in the coming months.

Conversely, existing home sales fell short of expectations, decreasing by 2.5% MoM compared to the anticipated decline of 1.3%, and were down 4.22% YoY, reaching their lowest level since December. Despite this, the combination of lower mortgage rates and increasing inventory points to potential future sales growth. As of the end of July, total housing inventory had reached 1.33 million units, a 0.8% increase from June and a 19.8% rise from 1.11 million units a year earlier. The median sales price for existing homes increased by 4.2% from July 2023, marking the 13th consecutive month of yearly price gains. However, the increase in inventory has been constrained by homeowners' reluctance to relinquish their sub-3% mortgage rates.

We expect that a recovery in the housing market may not occur until 2025. Mortgage rates remain elevated, though they are projected to decline gradually with anticipated Fed rate cuts.