So long as the economy holds up, disinflationary rate cuts are rocket fuel for equities

Despite a midday wobble following a slightly less dovish Chair Powell—who seemed to throw cold water on hopes for a 50-bps cut in November—the S&P 500 dusted itself off and sprinted within a whisker of record highs, capping off yet another high-octane quarter for U.S. stocks. So, what's the magic formula? Simple: As long as the economy holds up, disinflationary rate cuts are rocket fuel for equities. With the Fed teeing up more cuts, the stock market’s rally still has legs, and investors can sleep easy knowing that the Fed is ready to roll out "insurance" cuts as potential risks creep into the economic picture. And with inflation seemingly under control, market pressure for deeper Fed rate cuts isn't going anywhere.

As we march into a new month, attention shifts to the usual U.S. macro frenzy. Signs of softening income growth and consumers starting to feel the squeeze from a cooling labour market are on the radar. The spotlight, as always, is on payrolls, the ultimate market mover for U.S. stocks. After Friday’s jobs report, the focus will shift to election risks—but for now, it's all about the jobs data.

In the past, a stronger-than-expected number might have sent stocks tumbling as investors feared it would stoke inflationary fires. But in today’s climate, it would likely be seen as a positive—a reassuring sign that recession risks aren’t as ominous as everyone thought. It's a twist in market psychology: what used to spark concern over inflation now sparks relief that the economy might stay on track.

Now, let’s dive into the Fed’s eyebrow-raising 50-bps rate cut that left every economist scratching their heads. Even Powell acknowledged that the economy was in a "good place. " With his growing confidence in the labour market's strength, people were asking: What’s the rush? In his latest speech, Powell reminded us that the Fed is still glued to its data-dependent mantra and not in as much of a rush as rates markets suggested.

As a result, U.S. Treasury yields edged up, the odds of another jumbo 50-bps cut dropped to around 30%, and the dollar caught a rebound after Powell hinted that future cuts might be dialled down to more “traditional” sizes. It’s like the Fed’s gone from race mode to cruise control, but don’t be fooled; the game of 50 is far from over.

While there wasn’t much evidence of heavy stock market rebalancing—maybe just a touch of profit-taking to boost the books—the dollar caught a solid bid on the back of quarter-end flows. With U.S. stocks soaring, international funds had to boost their dollar hedges, adding to the greenback’s strength.

Meanwhile, USD/JPY took the express elevator up, zooming into the 143.75-144 zone as the odds of a 50 bp cut in November pared. Toss in a bit of confusion around Ishiba’s stance on policy, and the yen gave way to the dollar surge overnight.

China, however, continues to captivate global investors with its latest hyperactive policy scramble. In a move akin to throwing everything but the kitchen sink at the economy, Beijing unleashed a sweeping series of monetary stimulus measures and real estate and stock market props that have left markets buzzing. The result? On the final trading session before mainland markets go dark for a four-day national holiday, China’s benchmark stock indexes exploded by over 8%, marking the best single-day rally in 16 years and capping off the most bullish month in over a decade.

This massive surge erased all year-to-date and 12-month losses in just a week—talk about a comeback. For investors, it looks like Beijing has adopted a “whatever it takes” mentality, a policymaking urgency that, given September’s grim business survey readings, might not just be necessary—it could be the lifeline China desperately needs to stabilize its economy.