Later this month, stock markets widely expect the Federal Reserve to cut interest rates by 25 basis points. At the last meeting, Fed Chair Jerome Powell indicated that such cuts were hardly assured. He cited that weak labor markets would give the central bank a reason to lower rates. However, inflation is not only still high, but also above the target rate. Furthermore, inflation rates could still rise further.
The U.S. dollar hovered near its low not seen in five weeks. The currency market is anticipating a rate cut when the Federal Open Market Committee meets on December 9-10. Non-American Investors holding U.S.-based assets should brace for a weak dollar. That would deflate the value of their investments.
In the bond market, the 20+ Year Treasury Bond ETF (TLT) fell from a high of around $92 in October to close at $88.58. Financial firms, however, rallied. Wells Fargo (WFC) and JPMorgan Chase (JPM) are near their highs for this year. Banks benefit from falling interest rates. It increases borrowing activity, generating more transactions for the bank. This past week, Canadian banks like Bank of Montreal (BMO), Royal Bank (RY), TD Bank (TD), and CIBC (CM) posted strong results. They benefited from strong net interest income from consumer deposits. In addition, strong stock markets lifted profits in the capital markets division.
Your Takeaway
Stock markets partially priced in the rate cut. The chances are good that markets will continue their uptrend that they enjoyed all year.
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