A drop in U.S. inflation will likely lead to further interest rate cuts, helping the stock market reach record highs on Friday. This positive momentum began earlier in the week when Chinese authorities announced a major economic stimulus package.
The S&P 500 surged past 5,750, marking nearly a 100% gain compared to last year. Other stock market like in Europe also saw gains, with the Stoxx 600 index climbing 0.5% to a new high, alongside increases in Germany’s Dax, France’s CAC 40, and Britain’s FTSE 100.
U.S. inflation, measured by the Federal Reserve’s preferred index, fell to 2.2% in August, the lowest since February 2021. This has fueled expectations that the Fed may cut interest rates more aggressively in November.
Rate Cut Speculations Rise Amid Global Growth Concerns as China Takes Steps to Boost Economy
The possibility of a 0.5 percentage point reduction instead of a quarter-point cut increased after similar declines in inflation were reported in France and Spain, suggesting the European Central Bank might also cut rates before the year ends.
Despite these gains, the International Monetary Fund and OECD reported that global growth is stalling due to slowdowns in the U.S. and China. Analysts warn that without further measures to stimulate borrowing and investment, a recession in the U.S. could be on the horizon, alongside a significant drop in China’s growth rate.
In response, China’s central bank recently lowered mortgage rates and expanded borrowing options. Chinese leaders are also focused on boosting growth by increasing support for low-income citizens and providing funds to local authorities to stabilize housing prices.
Russ Mould from AJ Bell noted,
A veritable feast of economic stimulus measures has led investors to take a more optimistic view of the earnings potential for Chinese companies and foreign ones selling into the country.”
Russ Mould
He highlighted that lower borrowing costs and greater lending capacity could encourage more economic activity.
James Knightley of ING emphasized that the Fed will face pressure to continue cutting rates as the economy shows signs of weakness. He mentioned that,
The latest Conference Board consumer confidence report suggests households are becoming much more concerned about job security,”
James Knightley
This could impact consumer spending. With inflation stabilizing, the demand for significant Fed rate cuts is expected to persist, especially as upcoming U.S. data may show rising unemployment and a decrease in job creation.
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