Investment Viewpoint: US Fed cuts rates

Simplify the complex with clear and concise market insights direct from our investment experts every week.

Markets and macro insights with Bernard Swords, Chief Investment Officer

What were the main developments in markets last week?

• It was another strong week for global equity markets. The world index rose by almost 1%, bringing its month-to-date gain to just over 3%. Once again, new economy sectors – particularly technology and communications – led the charge, each rising around 2.5% over the week.

What were the central factors driving market strength?

• A key driver was company-specific news, most notably NVIDIA’s strategic investment in Intel, which lifted shares across the semiconductor industry. The move also reinforced investor confidence in the AI-driven economy, where demand continues to show strength.

• Cyclical sectors posted gains too, helped by confirmation of interest rate cuts, though the gains involved were more modest. Meanwhile, defensive sectors remained under pressure. It must also be kept in mind that the full impact of recent tariffs may still take several months to play out.

What was the overall situation of the US economy?

• Economic data released during the week from the US showed a generally benign picture. Retail sales proved to be a particularly positive area. Core retail sales rose 0.7% month-on-month, beating expectations of 0.4%. Previous months’ figures were also revised higher.

• Such developments suggests that consumer spending remains resilient, even in the face of tariff-induced price rises. However, as retail sales are reported in nominal terms, the growth may partly reflect higher prices and not only actual consumer activity.

• Industrial production edged up slightly, which was a better result than had been expected. Revisions to prior months’ production levels were also positive. While the industrial sector appears to be flatlining, it has not yet indicated any significant difficulties.

What is the position of the US Federal Reserve?

• The main event last week was the US Federal Reserve’s decision to cut interest rates by 25 basis points, citing increased risks to employment. However, their prognosis for the immediate and medium-term future was mixed. The Fed’s ‘dot plot’ – which shows each member’s rate expectations – suggests two more cuts this year, and one each in 2026 and 2027. However, there’s a clear divide between the members: seven of them expect no further changes this year.

• Comments from the Chair of the Fed, Jerome Powell, added to the uncertainty. He downplayed the trajectory sketched by the ‘dot plot,’ emphasising that the Committee is in data-watching mode and that decisions will be made meeting by meeting. His remarks made no advance commitment to any consistent pattern of continuing rate cuts. At the same time, Chair Powell acknowledged rising downside risks and stressed the need for a neutral policy stance, implying that more rate cuts are indeed likely, though the timing of these remains uncertain.

The week ahead: what to watch out for

This week, the main statistics will be the business sentiment surveys (the PMI’s) from the euro area and the US. We will get the Personal Consumption Expenditures (PCE) data from the US covering inflation and consumption growth. Consumer Sentiment in the euro area will also be released.