Investing.com — Stocks could see some near-term volatility after the Federal Reserve implements an expected rate cut on Wednesday, but the broader trajectory of stocks is likely to be more affected by coming economic data, Barclays analysts said.
Rates are expected to be cut for the first time since March 2020 following the conclusion of the latest two-day meeting, but the size of the cut remains a source of significant uncertainty for investors.
According to CME Group’s closely watched FedWatch Tool, the chance of a massive 50 basis point cut – rather than a more traditional 25 basis point drop – is 61%. Traders will also be looking for some insight into how the Fed plans to approach a potential easing cycle, with markets currently expecting a cut of at least 100 basis points by the end of 2024.
“With a lot of forgiveness that is now demonstrably included in the price […]“The Fed’s decision and communications on the interest rate path are likely to have an impact on near-term asset volatility,” Barclays analysts said in a note to clients on Wednesday.
As for equity markets, Barclays analysts say history suggests stocks “outperform” after the Fed launched an easing campaign with an initial quarter-point cut and the US economy managed to avoid falling into recession . However, they pointed out that when the economy has been in recession, stocks have fallen in the aftermath of the first cut.
The analysts added that it will likely take “some time” before investors know for sure whether the economy has avoided a recession, placing extra importance on data in the coming months. “We believe that a reliable and timely indicator of a recession is unemployment claims, which remain well behaved so far,” the analysts said.
Should the data indicate continued resilience in broader activity in the world’s largest economy, they predicted that “the bulk” of a rally in defensive stocks – recently supported by concerns about a bleak economic outlook – could come to a halt . . But, they noted, “history suggests [there is] no rush to take risks again.”
