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on september 18, the market bet that the probability of the federal reserve cutting interest rates by 50 basis points (bp) in september climbed to 65%, jumping from 30% last week to 59% at the beginning of the week. the actual interest rate decision will be announced at 2 a.m. beijing time on the 19th, and more importantly, the federal reserve's forecast outlook for future interest rates, inflation, and the job market (sep, or summary of economic projections) will also be announced at that time.

on march 15, 2020, the federal reserve announced another "emergency rate cut", directly reducing the interest rate by 100bp to a historical low of 0-0.25% to cope with the impact of the covid-19 pandemic. in the following years, aggressive rate hikes to fight inflation became the main theme. this week, after more than four years, the rate cut cycle will start again. this meeting is considered by all walks of life to be the most uncertain and important meeting, because whether it is 25bp or 50bp, it is considered feasible, so global traders are holding their breath, and assets such as commodities, stocks, bonds, and foreign exchange markets will fluctuate greatly.

matt weller, global head of research at gain capital, told reporters that this week's meeting can already declare the fed a "failure." after all, in the post-bernanke era of "fed communication as a policy tool," this is the most uncertain fed meeting ever for traders. the lack of clear "leaks" or "sources" from well-known financial journalists this week only highlights the degree of uncertainty. "i think it was a mistake for the fed not to cut rates in july, and the continued deterioration of the labor market since then means that the fed - an inherently risk-averse institution - will likely choose a 'safer' 50bp rate cut in an effort to control the risk of a continued slowdown in new employment."

the “dot plot” will dominate the trend of the us dollar

is it 25 or 50 basis points? this is the biggest suspense of this meeting. if a 25bp rate cut is expected to help the us dollar index rebound in the short term and stay away from its low point in more than a year, the decision of the atlanta fed to raise its gdp growth forecast for the third quarter to 3% may add weight to the 25bp rate cut, but the market's attention will immediately turn to the probability of a 50bp rate cut in november.

if the interest rate is cut by 50bp, it will continue to suppress the trend of the us dollar and reveal the fed's concerns about the current economic situation. in other words, compared with the inflationary pressure that has already declined significantly, the fed believes that maintaining full employment and avoiding economic slowdown are more important and difficult, so it may cut interest rates more aggressively.

beyond the initial rate decision, the fed’s summary of economic projections (sep) will be a key factor in how the market interprets the entire meeting, representing the ultimate “destination” of the current rate-cutting cycle.

the median sep forecast for the future terminal rate in june was 2.8%, but it may now be slightly raised to 2.9% or 3.0%, indicating that the rate cut cycle will be (slightly) extended next year. wall street currently expects the terminal rate to be in the range of 3.25%-3.5%. in addition, the dot plot in june predicted that the median interest rate would fall to 5.1% by the end of this year and 4.1% by the end of next year. obviously, both of these values ​​are much higher than the current market expectations (4 rate cuts this year and 10 cumulative rate cuts by the end of next year), so they may be significantly lowered. "dovish rate cuts" may put pressure on the us dollar and stimulate gold to rise.

weller believes that powell's press conference (02:30) should touch on topics such as soft landing and recession, which may reinforce the views in the meeting statement or downplay overly aggressive expectations of rate cuts. therefore, market volatility may continue until after the press conference, when the market will form clearer trends and judgments.

traders expect that the fed will either "cut interest rates by 25bp" this time, that is, the fed will lay the foundation for more aggressive rate cuts to offset concerns that the central bank is "behind the curve"; or "cut interest rates by 50bp" hawkishly, emphasizing that a larger rate cut is a preliminary adjustment and not necessarily a sign of concern about the economy. the argument that can be made is that the current real interest rate (nominal interest rate-inflation expectations) is as high as 3%, the highest since the financial crisis, and a contractionary interest rate level, so a large rate cut is to normalize interest rates, not because of an economic recession.

global stocks and bonds will still perform well

although there is uncertainty in interest rate decisions, rate cuts are a foregone conclusion and a recession has not yet arrived, so this combination has historically been bullish for the stock and bond markets.

"soft landing" remains the main benchmark forecast of institutions. wu meiyan, director of fixed income investment at schroders, told reporters that according to historical experience, economic recessions almost never happen "out of thin air". there must be reasons, usually with major external or local shocks (such as oil crises, banking crises, epidemics, etc.), and we are not in such an environment yet. at the same time, the us presidential election is imminent. the two candidates have put forward policy positions that are conducive to economic growth and do not seem to be overly concerned about fiscal deficits, which reduces the possibility of a medium-term economic recession.

in this case, institutions are still optimistic about us bonds. lower bond yields (higher prices) in a rate cut environment will bring capital gains to bond holdings, while the coupons are still considerable. us stocks have always tended to rise in election years.

shaoke zeng, head of fund distribution for asia (excluding japan) at pictet asset management, recently told reporters, "our team found that in the six periods of significant interest rate cuts in 1989, 1995, 1998, 2001, 2007 and 2019, stocks and bonds basically benefited. although there are some years when both stocks and bonds fall, and some years when bonds fall and stocks rise, overall on average, stocks and bonds will have a relatively good performance."

bloomberg data also shows that from 1989 to the present, in the federal reserve's six interest rate cut cycles (1989/1995/1998/2001/2007/2019), the average performance of stocks and bonds in the first year after the interest rate cut was 9.7% for the nasdaq, 5.8% for the s&p 500, 6.2% for u.s. treasuries, and 5.7% for u.s. aggregate bonds.

gold prices are still expected to rise, oil prices are under pressure

recently, under the influence of the expectation of interest rate cuts, gold and oil prices have risen significantly. both are denominated in us dollars and tend to benefit from a weaker us dollar or lower interest rates. however, traders are more inclined to go long on gold and short on crude oil.

ubs told reporters that "the upward momentum of gold is expected to continue. the price of gold has risen by more than 24% so far this year. we are optimistic that increased investment demand will drive gold prices further up."

according to data released by the world gold council, physically backed gold exchange-traded funds (etfs) saw net inflows in august, marking four consecutive months of net inflows. total etf holdings rebounded to about 3,182 metric tons, the highest level since the beginning of this year. as the upcoming fed rate cuts reduce the opportunity cost of holding this non-interest-bearing asset, ubs expects gold prices to rise to $2,700 per ounce in june next year. in the face of macro and geopolitical uncertainties, gold's safe-haven properties also make it attractive from a portfolio perspective.

weller said that if the rate cut and interest rate guidance are less dovish than market expectations (four rate cuts this year and 10 rate cuts by the end of next year), gold prices may face correction pressure, and the initial support around $2,550 will be focused on below. on the contrary, if there is a 50 basis point rate cut + a significant reduction in the dot plot interest rate forecast, it will provide continued upward momentum for gold. if the historical high of $2,589.70 is broken, we may soon see prices rise to $2,600.

in contrast, oil prices may still be constrained by the slowdown in global demand, including in china. on september 11, opec lowered its forecast for oil demand growth this year and next, which once again dealt a heavy blow to oil prices, which had been falling for four consecutive weeks. wti crude oil fell below $66 per barrel, hitting a one-and-a-half-year low, but then oil prices rebounded by nearly 10% amid expectations of a rate cut. in september, eight opec+ countries agreed to extend their additional voluntary production cuts by two months until the end of november. but the outlook for future demand is weak.

recently, morgan stanley has lowered its oil price forecast again, believing that the global oil market is in a period of weak demand. citigroup even predicts that due to oversupply in the market, oil prices may fall to around $60 per barrel by 2025. traders believe that on the downside, $67.65 is the point where both sides have been fighting this month, so it is worth noting. the next target is the september low of $64.05. but if the price succeeds in rising, $72.34 and $76.42 are the first points to pay attention to.