Mixed Signals from the Fed

STOCK INDEX FUTURES

Stock index futures are higher following the Fed’s decision to lower interest rates by 25 bps on Wednesday and an announcement from Nvidia to invest $5 billion into Intel. Markets initially reacted negatively to the Fed news, with Fed Chair Powell characterizing the action as a risk management cut in response to a weakening labor market. Analysts differed on the signals sent by the Fed, with opinions of the cut and commentary ranging from dovish signals to not dovish at all. Powell also indicated that lingering inflation risks remain, while the Summary of economic projections showed no change in where policy makers think inflation will land at the year end, offering a hawkish signal despite anticipations that the Fed will cut rates two more times this year.

On the corporate front, shares of Intel surged nearly 30% in premarket trading after Nvidia announced a $5 billion investment in the chipmaker although the move does not offer Intel a manufacturing deal.

Weekly jobless claims came in lower than expectations with 231,000 new claims vs. an expected 241,000. Last week’s claims were revised slightly higher to 264,000.

CURRENCY FUTURES

The USD index moved higher as investors continue to digest Powell’s comments and the summary of economic projections. The dollar finished higher choppy trade on Wednesday following the Fed’s decision to cut rates and comments from Fed Chair Powell, where he warned that inflation risks remain alongside elevated risks to employment. Powell characterized the cut as a risk management cut in response to a weakening labor market, but also noted that the central bank did not need to rush easing. The Fed’s updated dot plot also shows the committee is expecting the Fed Funds rate to land at 3.6% by year end (median response value). This is one more rate cut than was projected back in June, although there was a wide dispersion of forecasts signaling that a high degree of uncertainty remains, likely why markets reacted they did.

Euro futures are lower, retreating from their highest level in four years following a knee-jerk reaction to the Fed announcement. In Europe, the ECB left rates unchanged for a second consecutive meeting last week, suggesting its rate-cutting cycle may be over. Policymakers continued to stress caution: Executive board member Isabel Schnabel urged policymakers to “keep a steady hand,” citing risks from tariffs, services inflation, food prices, and fiscal policy. Euro area inflation was revised down to 2.0% from 2.1%. Germany publishes producer price inflation data for August on Friday, while Spain releases industrial orders figures for July. Also on Friday, France’s monthly business survey for September is due, a key insight into businesses’ well-being in light of the recent change in government.

British pound futures fell lower after the Bank of England left its key interest rate unchanged Thursday at 4%, but scaled back a program designed to shrink its holdings of government bonds that has attracted increased scrutiny as yields have risen. Seven members of the Monetary Policy Committee voted to leave borrowing costs as they were, with two supporting another rate cut. BoE policymakers are growing more worried about a pickup in inflation that has been driven by food and increases in a series of prices that are guided by government policy, including a 26% increase in water charges. Inflation in the country stands at 3.8%, having started 2025 at 3.0%. Policymakers estimate that the inflation rate is close to its peak, and see it falling back to their target as wages slow in response to the cooling jobs market. The BoE decided to reduce the pace at which it is shrinking its gilt holdings to £70 billion in the 12 months through Sep. 2026 from £100 billion in each of the two previous 12-month periods. That will reduce the size of the portfolio to £488 billion. Investors continue to see little chance of a rate cut from the BoE before year end given the signals from the bank that warned of the pickup in inflation. UK retail sales and public finances data for August are due Friday, alongside the GfK consumer confidence indicator for September.

Japanese yen futures are lower ahead of the Bank of Japan’s policy decision on Friday. The central bank is widely expected to leave rates unchanged, although markets price in a 50% chance of a quarter-point hike by year end.  Economists expect that the central bank will resume rate hikes again soon as inflation remains sticky and headwinds from trade uncertainty with the US ease. CPI figures due ahead of the BoJ’s policy announcement are expected to show prices having risen by 2.7% in August on an annualized basis, down from July’s 3.1%. Investor spotlight will center around an October 4 vote where the ruling Liberal Democratic Party will elect a new leader to replace the outgoing Prime Minister Shigeru Ishiba. Japan’s farm minister and the chief government spokesperson joined the race on Tuesday to lead the ruling party and replace outgoing Prime Minister Shigeru Ishiba.

Australian dollar futures are lower after employment figures showed the economy lost over five-thousand jobs in August against expectations of a 21,500 gain. The net decrease in employment was driven by a sharp drop of 40,900 full-time positions. The unemployment rate held steady at 4.2% while the participation rate edged lower to 66.8%, signaling a gradually softening labor market. Despite the weak print, markets imply only a 20% chance of a rate cut by the Reserve Bank of Australia at the September 30 meeting, with expectations rising to 70% for November.

INTEREST RATE MARKET FUTURES

Futures are lower across the curve. Markets bought the rumor and sold the news on Wednesday. Treasurys whipsawed following the Fed’s decision to cut interest rates by 25 bps and signals from the committee that two more cuts are on the table before year end. In a presser following the decision, Fed Chair Powell said the Fed is in a “meeting-by-meeting situation” regarding the outlook for interest rates and characterized the cut as a risk management cut rather than the start of a new easing cycle, prompting markets to scale back expectations of future easing. Powell also added that the Fed is well positioned to move on any economic developments, but the committee felt cutting rates was appropriate given the downside risks to the labor market. Powell also noted that “no risk-free path” is available for the Fed.

Despite what on the surface is a dovish move from the Fed, six members of the FOMC projected no more interest rate cuts by the end of the year, while one member expects the central bank to hike rates. The Summary of Economic Projections showed that committee members see GDP growing 0.2% over the previous projection, while unemployment and inflation remain unchanged while also expecting two more quarter-point reductions at the remaining two policy meetings. The SEP, alongside comments from Powell, sends mixed signals from the bank, highlighting a high degree of uncertainty about future economic conditions. The dot plot showed policymakers have little to no agreement on how the bank should react to current economic conditions, despite a consensus 11-1 vote to cut rates by 25 bps.

The spread between the two- and 10-year yields rose to 53.8 bps from 50.4 bps on Wednesday.

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