Stock futures for S&P 500 and Nasdaq are soaring to new peaks, driven by investors' assumptions of a September interest rate reduction.
U.S. Federal Reserve Anticipates September Interest Rate Cut
The outlook for U.S. Federal Reserve interest rate changes in September 2021 is strongly pointing towards a 25 basis points (0.25%) rate cut. This prediction is largely influenced by a series of economic factors and recent job market data.
The July jobs report, which saw only 73,000 jobs added compared to an estimated 110,000, has raised concerns about potential layoffs and unemployment risks. This weak labor market performance has garnered attention, particularly from the Federal Reserve.
Fed Chair Jerome Powell described the labor market as being in a "curious kind of balance," with risks shifting towards employment weakness. He acknowledged persistent inflation pressures, particularly from tariffs, but indicated that the Fed’s decision will be data-driven, leaving the door open for a September rate cut if job market risks materialize.
Inflation remains above the Fed’s 2% target, partly due to tariffs which are increasingly expected to push consumer prices higher. However, the inflationary pressure from tariffs is seen as a risk factor causing the Fed to proceed cautiously.
Market expectations also support a rate cut. CME FedWatch and investor sentiment show about a 90% probability of a rate cut at the Fed's September meeting, up sharply from earlier months. The market is pricing in roughly 2.5 rate cuts across the remaining Fed meetings of the year.
Within the Federal Open Market Committee (FOMC), two governors have already expressed support for a rate cut to support a weakening labor market. The FOMC is weighing upside inflation risks against downside employment risks.
Investors will closely watch the remarks of Chicago Fed president Austan Goolsbee, a federal open market committee voting member this year, as his comments could provide further insight into the Fed's decision-making process.
Meanwhile, the Nasdaq 100 E-minis are up 54.25 points, and the Dow E-minis and S&P 500 E-minis are also experiencing marginal increases in premarket trading. However, rate-sensitive banking stocks, including Bank of America and Citigroup, have seen marginal increases, while CoreWeave, a company backed by Nvidia, suffered a 9.2% loss after reporting a larger-than-expected net loss.
The CBOE volatility index dropped to its lowest since January, and the S&P 500 marked a new record high close in the previous session. Crude prices are currently trading around US$60 per barrel ahead of a virtual meeting between Donald Trump and European leaders regarding the Russo-Ukraine conflict.
In the business sector, Venture Global, a liquefied natural gas (LNG) major, saw a 9.3% increase after winning a legal battle against Shell over long-term LNG contracts.
This assessment reflects the latest comprehensive data and official comments as of August 2021, referencing the September 2021 context. It should be noted that while the timeline in the query may not match the results, the substance about the Fed’s rate outlook matches the recent data points in the sources.
[1] CNBC (2021). Fed rate cuts in September are now a near certainty, CME Group's FedWatch shows
[2] Reuters (2021). Fed's Powell says labor market is in a curious kind of balance
[3] MarketWatch (2021). Fed's Powell: Labor market is in a 'curious kind of balance'
[4] Bloomberg (2021). Fed's Daly Says July Jobs Report Shows 'Significant Slowing'
[5] Wall Street Journal (2021). Fed's Powell Says Job Market Still Needs More Support
- The Fed's decision-making process regarding a September interest rate cut could potentially impact the Malaysian government's fiscal policy, as changes in U.S. interest rates can influence foreign investments and the country's financial market.
- In reaction to the anticipated September rate cut, some investors may reconsider their tech-focused portfolios, such as investments in CoreWeave, a company backed by Nvidia, or seek opportunities in sectors less sensitive to interest rate changes, like Venture Global, a liquefied natural gas (LNG) major.
- As the U.S. Federal Reserve considers a rate cut due to the weak labor market and inflationary pressures, businesses within the technology sector in Malaysia might experience fluctuation in profitability, depending on their dependence on international markets and access to financing.
- The Malaysian government may consider altering its tax policies to support key industries negatively affected by the U.S. interest rate decision, ensuring the stability of the business sector and promoting local investing opportunities in a time of global financial uncertainty.
