Last week, financial markets broadly advanced, supported by growing expectations of a Fed rate cut at its upcoming meeting. The ADP survey showed a loss of 32,000 private-sector jobs, reinforcing the view that monetary policy may become more accommodative. The Core PCE, released today, came in line with expectations, leaving market sentiment unchanged. As a result, Wall Street is trading near all-time highs, and risk appetite could remain strong, supporting the prospect of a traditional year-end rally.
Current economic environment
Monetary Policy:
- The Fed is expected to cut rates by 25 basis points, with a probability estimated at 87%, at its meeting next Wednesday.
- Jerome Powell’s speech will be crucial, especially after his last appearance, which was interpreted as more hawkish than dovish.
- Inflation and Economic Indicators:
- The Core PCE rose 0.2% month-on-month, in line with expectations, confirming moderate inflation.
- Long-term yields remained stable, with the 10-year U.S. Treasury trading in a horizontal consolidation channel between 3.95% and 4.17%.
- Equity Markets:
- Stock indices remain resilient despite high valuations, supported by corporate earnings growth expectations and the prospect of a more accommodative monetary environment.
- Risk appetite remains intact, favoring positive performance into year-end.
Investment recommendation
Why Invest in equities today:
- Short-term upside potential: Expectations of a Fed rate cut support markets and equity performance.
- Index resilience: Stocks are holding up despite elevated valuations, driven by expected earnings growth.
- Year-end rally: Historically, year-end is favorable for equities, reinforcing the opportunity for tactical long positions.
- Diversification and prudent strategy: In an accommodative macro environment, combining growth and defensive sectors can help limit risk.
⚠️ Risks to Consider
- Volatility could increase following Jerome Powell’s speech if the tone surprises the market.
- High stock valuations may limit upside potential in case of disappointing news.
- Bond markets remain sensitive to economic data and shifts in inflation expectations.
Recommended Position: Accumulate / Hold equities tactically, targeting cyclical and defensive sectors to benefit from the accommodative monetary context and potential year-end rally.