🌍 The impact of rate cuts

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Good morning investors! Stocks and crypto rallied yesterday with some hitting new highs.

Today we cover:

• The global impact of rate cut

• Stocks hit new highs

• Gold still a golden choice

📊 Economy and News 

The Impact of Federal Reserve Interest Rate Decisions on the U.S. and Global Economy

The Federal Reserve's decisions regarding interest rates play a pivotal role in shaping the U.S. economy, which in turn influences global markets. Gregory Daco, chief economist at EY-Parthenon, explains that the significance of the Fed stems largely from the size and growth of the U.S. economy, one of the largest and fastest-growing globally.

September 2024 Fed Meeting and Interest Rate Adjustments

At its September 2024 meeting, the Federal Open Market Committee (FOMC) opted to lower the federal funds rate, a move that has broad implications. Interest rate adjustments by the Fed affect the cost of borrowing for consumers, including loans and mortgages, and also impact the value of assets like cash, bonds, and stocks. This policy shift comes as global inflation was recorded at 5.9% by August 2024, with advanced economies, including the U.S., experiencing an average inflation rate of 2.6%, according to the International Monetary Fund (IMF).

U.S. Labor Market and Inflationary Pressures

The decision to reduce interest rates follows a period of mixed labor market data. By August 2024, the U.S. unemployment rate was 4.2%, with 7.1 million people out of work, reflecting a slight deterioration from the previous year, when unemployment stood at 3.8%. The Fed’s rate cuts aim to address these challenges while also mitigating inflationary pressures.

Globally, central banks have been raising interest rates in response to inflation, and the synchronized tightening of monetary policy has heightened the overall economic impact. The European Central Bank (ECB), for example, reduced its policy rate twice in 2024. Despite these challenges, the IMF projects global GDP growth to reach 3.2% in 2024 and 3.3% in 2025.

Global Effects of Fed Policy Decisions

Federal Reserve policies have a ripple effect beyond the U.S. borders, influencing foreign exchange markets and economies worldwide. As the U.S. dollar remains the global reserve currency, changes in U.S. interest rates impact borrowing costs in emerging markets, where many loans are denominated in dollars.

China’s Efforts to Expand Yuan’s Global Influence

Meanwhile, other nations are attempting to boost the international presence of their currencies. China, through its central bank, the People's Bank of China, has been managing the value of its currency, the yuan (or renminbi), to support its trade objectives. China has also developed its own network of swap lines, offering an alternative to those provided by central banks such as the Federal Reserve and the ECB.

China's efforts to increase the global role of the yuan include leveraging its expanding electric vehicle industry, as it transitions away from a debt-driven growth model. Despite these efforts, the yuan accounted for only 4.3% of global payments in 2023, compared to 47% for the U.S. dollar and 23% for the euro, according to the Federal Reserve.

In summary, the Federal Reserve’s interest rate decisions continue to shape both the U.S. and global economies, with significant effects on inflation, currency markets, and international trade.

Global hits:

• Bank of England presses pause on rate cuts, highlights ‘gradual approach’.

• Elon Musk’s X and Starlink face nearly $1 million in daily fines for alleged ban evasion in Brazil.

• Tesla’s Chinese rival Nio cuts price for new Onvo-branded car.

Controversial: Nike CEO John Donahoe is out, replaced by company veteran Elliott Hill.

📈 Stocks

S&P 500 5,713.64 (+1.70%)
DJIA 42,025.19 (+1.26%)
NASDAQ 18,013.98 (+2.51%)
BRENT CRUDE 74.88 (+1.67%)
* Prices as of Mar 3rd, 12:20 AM UTC

Fed’s rally is here

Stocks surged as the Dow Jones Industrial Average and S&P 500 reached new record highs. This positive market reaction came after the Federal Reserve announced on Wednesday a reduction in interest rates by half a percentage point, signaling confidence in their approach to manage the economy.

The tech-heavy Nasdaq is now up 20% for the year.

Tech stocks led the rally, with Nvidia and AMD shares climbing by about +4% and nearly +6%, respectively, while Micron Technology saw a 2.2% increase. Major tech companies like Meta Platforms and Alphabet also saw gains of 3.9% and 1.5%, respectively.

Elsewhere, Amazon jumped +1.85% after the company introduced Amelia, an AI assistant for third-party sellers.

Companies poised to benefit from the lower interest rates also saw strong performances. JPMorgan Chase rose +1.4%, while industrial players like Caterpillar and Home Depot gained +5.1% and +1.7%, respectively.

New data: Investors were further reassured by a report showing that weekly jobless claims dropped by 12,000 to 219,000, a figure significantly below expectations, reinforcing hopes of a soft economic landing.

To go higher? It seems analysts are bullish. BMO Capital markets chief investment strategist Brian Belski boosted his year-end S&P 500 (^GSPC) target to 6,100 from 5,600.

Controversial: UAW warns of potential strikes at Ford, Stellantis a year after unprecedented work stoppages. On the other hand, The Walt Disney Company will no longer use Slack for in-house company communication.

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💵 Personal Finance

Gold’s Rally in 2024: Early Gains and Expectations

Historically, gold prices often rise during Federal Reserve rate-cutting cycles. However, in 2024, the rally has already been in motion before any official cuts. By mid-September, spot gold prices had surged nearly 25% year-to-date, outperforming both the S&P 500 and Nasdaq Composite indices.

Interest Rate Cuts and Gold's Performance

Generally, gold prices tend to rise when interest rates fall. This is because gold, which doesn’t generate interest, becomes more attractive compared to bonds offering lower yields. In the last non-pandemic rate-cut cycle in 2019, gold prices increased by 6% between the first rate cut in July and the end of the year.

The strong performance of gold in 2024 has prompted some analysts to question whether the rate cuts are already factored into current prices. For instance, BlackRock's Investment Institute had projected gold's range for the year, and the current price is already near the higher end. However, some experts believe that falling rates could still drive further demand for gold, suggesting a shift in market dynamics.

Central Bank Buying: A Key Driver

One significant factor behind gold’s rally in 2024 has been large-scale buying by global central banks and sovereign wealth funds, rather than retail investors. According to the World Gold Council, central bank demand for gold doubled during 2022 and 2023 and is on track to maintain similar levels this year. Many emerging market central banks are increasing their gold reserves to strengthen their currencies and mitigate risks in case of a potential monetary shift.

Concerns over the U.S. government's use of the global banking system for economic sanctions, such as those imposed on Russia, have also influenced foreign policymakers to diversify away from U.S. dollar assets and into gold.

Shifts in Gold ETF Investments

While central banks have been boosting their gold holdings, smaller investors have been largely selling gold exchange-traded funds (ETFs) for much of the year. Gold ETFs saw over $800 million in net outflows by mid-September. However, there has been a recent reversal in this trend, with inflows into major gold ETFs like the SPDR Gold Shares (GLD) and Gold MiniShares Trust (GLDM). If this renewed interest from smaller investors continues, it could provide additional support for gold prices.

Future Outlook: Where Could Gold Go Next?

Technical analysts point to gold’s price charts as an indicator that the rally may continue. Some have set price targets of up to $2,800, roughly 9% higher than current levels. Analysts note that gold’s past rallies following rate cuts have been larger than the gains seen in 2024 thus far, especially when accompanied by economic recessions, which often increase demand for gold as a safe-haven asset.

We think gold is a great asset to invest in as it remains solid even when the market falls. It can, in fact, be a great retirement buy as well. Check this Gold IRA Guide to learn about Gold IRAs and the benefits they offer.

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