As U.S. inflation continues to slow, market expectations are rising for a Fed rate cut, with some predicting it could come as early as the September meeting. This is driving demand for risky assets.
No wonder the S&P 500 has closed in the green for eight consecutive sessions, its best streak since November 2023. It's hard to believe that just a few weeks ago, there was so much concern about a recession.
Now, let's see if Fed Chairman Jerome Powell's speech at the Jackson Hole economic symposium on Friday provides more details or clues that a change in monetary policy is on the way.
Assuming this is the case, what will happen then?
A 50 basis point rate cut is unlikely to solve all problems for businesses and households. Rates will remain relatively high, keeping pressure on their finances.
This means we are unlikely to see a significant shift in bankruptcy statistics from rising to falling soon. Part of the reason is that changes in monetary policy take time to impact the economy.
To be more precise, rate changes typically take between nine and twelve months to have a noticeable impact. Thus, any positive effects will take time to manifest themselves.
In the meantime, financial markets are already reacting. Investors tend to look ahead and try to anticipate what is to come, so they are now acting on those expectations.
In anticipation of a Fed rate cut, the gold price has broken above the key psychological level of $2,500 and could even reach $2,700 by the end of the year. Silver is also starting to get a boost.
For the first time, a gold bar has surpassed $1 million. With a single gold bar, you could secure a comfortable retirement... if you can get your hands on it.
Interestingly, 10-year Treasury yields haven’t entirely followed this pattern, as major bond market players are beginning to hedge against a possible rise in inflation. However, if rates are cut, their value could go up.
On the other hand, large technology stocks and other overvalued risk assets could face difficulties. Therefore, it is crucial to assess the trading multiples of each company before it is too late.
Finally, the dollar could continue to weaken against the euro, even though it already hit a five-month low on Monday. However, this is only one possible scenario and may not necessarily come to pass.