U.S. rate cut anticipated

U.S. Treasury Bonds and the Federal Reserve anticipate a rate cut to remedy poor economic data, thereby promoting long-term economic growth and stability.

We share an analysis of the latest news on the U.S. rate cut, by Paula Bujiaeconomist, financial and investment advisor.

July U.S. Employment Report.

• Unemployment rate: 4.3% vs. 4.1% estimated.

• Job creation: 114K vs. 175K estimated.

• Average hourly earnings (m/m): 0.2% vs. 0.3% estimated.

Market reaction

• Stocks: Fall by an average of 2%, with the technology sector and small caps leading the declines.

• UST 10Y: 3.8%, -15bps prior to the data.

• UST 2Y Rate: 3.9%, -20bps prior to data.

• Dollar: Down 1%, gold rises.

Analysis

Recent labor market data reflect a scenario that could anticipate beneficial monetary policy adjustments for long-term economic growth. With unemployment exceeding expectations and a slowdown in job creation, it is clear that the economy is experiencing some challenges. These indicators suggest that the Federal Reserve may consider a more aggressive rate cutting strategy to promote growth and economic stability.

Fed Chairman Jerome Powell recently mentioned that they are prepared to respond to signs of weakness in the labor market, with current rates at 5.25%. This opens the door to possible 50 basis point reductions in September or even three rate cuts during the year. These moves could stimulate key sectors of the economy, especially those sensitive to interest rates.

While not necessarily indicating an imminent recession, these adjustments could lead to a recalibration of growth expectations, especially in consumption and corporate earnings. This could result in a healthy market correction and offer new investment opportunities.

Lower rates could also favor a rotation into more sensitive sectors, such as small caps, value/defensive stocks, real estate, emerging markets and commodities, presenting better entry points for investors. In this context, our model portfolios are strategically positioned with an overweight in long duration sovereign debt and an underweight in equities, in line with these market conditions.

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