Federal Reserve's Dovish Signals: Rate Cut Expectations Stimulate Global Risk Asset Rally

Federal Reserve Chair Jerome Powell adopted a dovish stance at the Jackson Hole meeting. This news not only bolstered U.S. stock markets but also led to a rise in global risk asset prices, with cryptocurrencies and Chinese concept stocks significantly surging last Friday. In his speech at the economic policy symposium, titled "Economic Outlook and Framework Review," Powell emphasized the rising risks to employment, the improving inflation trend, and clearly indicated an impending adjustment to monetary policy. The key points of his remarks are as follows:

Rising Employment Risks: The labor market has cooled from an overheated state; however, the unemployment rate remains stable while risks are increasing, underscoring that "downward risks to employment are rising," necessitating a priority on maintaining employment stability. This reflects a shift in the Federal Reserve's policy focus from combating inflation to balancing employment.

Improving Inflation Trend: Inflation has retreated from its peak to an acceptable level, approaching the 2% target. Powell stated that "inflation has fallen to a sufficient level" and confirmed that a monetary policy adjustment "may be forthcoming," hinting at potential interest rate cuts beginning in September.

Adjustment of Policy Interest Rates: The current policy interest rate is 100 basis points (1%) below last year's neutral rate. Powell suggested that the Federal Reserve is prepared to lower interest rates in response to risks of economic slowdown, although the magnitude and timing of adjustments will depend on data.

Framework Review: He reiterated that the Federal Reserve's monetary policy framework is effective and will continue to monitor inflation and employment data in the future to avoid overreacting.

For financial markets, there is greater concern about the decline in neutral interest rates rather than merely nominal rates. This information leans towards the assessment that the U.S. economy is performing steadily, which is a crucial element in bolstering market confidence. From his remarks, it appears that the Federal Reserve will closely monitor certain labor market data in the short term, such as non-farm payroll figures and the unemployment rate. As long as downward pressure on the economy increases, monetary policy will likely lean towards a more accommodative approach to address economic downturn pressures.

Changes in the Interest Rate Futures Market

Powell articulated a clear dovish stance at the Jackson Hole meeting; however, it is noteworthy that changes in interest rate expectations were not as significant as anticipated. The following are predictions from CME interest rate futures, showing that over the past week, expectations for interest rate declines have increased, but the changes were not as pronounced as expected. By the end of 2025, rates are likely to be reduced twice to a range of 3.75% to 4.00%; similarly, by the end of 2026, rates are expected to decrease to between 3.00% and 3.25%.

The author wishes to express that a decline in interest rates has never been the primary logic behind the rise of the U.S. stock market; rather, it is the presence of stable economic growth alongside controlled inflation that is crucial. The decrease in the neutral interest rate reflects the emergence of these conditions. The neutral interest rate is a 'balanced' rate level set by the Federal Reserve, which neither stimulates an overheating economy (leading to inflation) nor suppresses economic growth (resulting in recession). With the emergence of discussions surrounding a declining neutral interest rate, it indicates that the Federal Reserve will closely monitor the risks of economic downturn, and there will be monetary policy measures to counter economic downward pressure, thereby ensuring stability in both the economy and inflation.

Therefore, looking at the performance of U.S. Treasury bonds, for example, $U.S. 10-Year Treasury Notes Yield(US10Y.BD)$ the yield is currently still maintaining a level above 4%, but the downward trend is unlikely to change. The signs of a gradual decline from high levels of the risk-free rate are an important factor favorable to financial market performance. When interest rates decline too significantly, it instead raises concerns about the risk of economic recession.

The reason why the market is so exuberant

Apart from the dovish comments from the Federal Reserve stimulating the market, another reason is the significant change in the interpretation of officials' views recently. Ahead of the Jackson Hole monetary policy symposium, the market focused on the minutes from last month’s Federal Reserve meeting, which mentioned that 'the upward pressure on inflation remains more concerning than the risks to employment.' This is another factor raising market concerns about the divergence between Federal Reserve policy and the economy following the larger-than-expected increase in the U.S. Producer Price Index last month. The signals released by the Federal Reserve during this economic policy seminar aligning with market consensus are important factors contributing to stabilizing the stock market amid unclear information.

Of course, a low interest rate environment favors the performance of growth stocks, leading to a shift of funds from defensive assets to risk assets; however, for technology stocks, the more crucial aspect is the growth and normalization of AI technology applications, as the overall impact of technology on the economy is the core investment logic.

Short-term market outlook for U.S. stocks

$S&P 500 Index(.SPX.US)$ and $Nasdaq Composite Index(.IXIC.US)$ It remains above a medium to short-term upward trend line, and the upward trend has not changed to date. $Russell 2000 Index(.RUT.US)$ and $Dow Jones Industrial Average(.DJI.US)$ Recently, there has been a catch-up effect, with both year-to-date and historical highs being reached. Aside from the temporary doubts raised by the perception of interest rate cuts, some views in the technology sector are also being questioned. For example, a report from short-sellers on Palantir mentioned last week, and there are market reports from MIT indicating that 95% of institutions that invested in AI have only achieved 'zero returns' so far.The author does not believe that these news items will alter market perceptions regarding the development of the AI industry; rather, they provide a short-term excuse for some investors lacking confidence in the market to short-sell.。

As market sentiment rebounds, these noisy reports are expected to gradually fade. Technology stocks may continue to recover in the future. However, the recent slight adjustment also demonstrates the benefits of diversification; for instance, while the Dow Jones Industrial Average has underperformed year-to-date, it has shown more stable performance during pullbacks due to its inclusion of defensive stocks, such as $Johnson & Johnson(JNJ.US)$ $Verizon(VZ.US)$ $McDonald's(MCD.US)$ $3M(MMM.US)$ or some financial stocks such as $Goldman Sachs(GS.US)$ and $JPMorgan(JPM.US)$ support, along with other industrial stocks such as $Caterpillar(CAT.US)$ has remained strong to this day.

However, from a very short-term perspective, the stocks that led the market rise last Friday were primarily those with a higher sensitivity to economic conditions, as the market is currently in another RISK ON phase. Short-term investments are still primarily focused on tracking BETA, particularly in technology stocks. For instance, NVIDIA, which is set to announce its earnings on August 27, has optimistic market expectations, and over the weekend, reports emerged that it may provide a new chip B30A for China in the future. This news may also serve as a catalyst for revitalizing the semiconductor sector, warranting close attention to the investment atmosphere across the entire sector in the short term. (Source: "The performance of NVIDIA's B30 may be 80% of that of the Blackwell GPU.」)

Recently, significant adjustments have been made to many large technology stocks, and technical analysis can be used to assess whether a short-term trend reversal is occurring. Among these, GOOGLE has once again reached an all-time high during trading, while TESLA's short-term performance this month has also been relatively strong; it is highly likely that the capital is merely rotating within the sector.

Semiconductors: $NVIDIA(NVDA.US)$ $Broadcom(AVGO.US)$ $Advanced Micro Devices(AMD.US)$ $Taiwan Semiconductor(TSM.US)$ $Intel(INTC.US)$

Large Technology Stocks: $Microsoft(MSFT.US)$ $Meta Platforms(META.US)$ $Amazon(AMZN.US)$ $Apple(AAPL.US)$ $Alphabet-C(GOOG.US)$ $Tesla(TSLA.US)$ $Palantir(PLTR.US)$ $Netflix(NFLX.US)$