San Francisco Frontiers - Equity markets, yen rally after jumbo US rate cut

After a keenly awaited meeting, the US central bank decided to lower borrowing costs for the first time since the start of the pandemic by opting for a half-point reduction.

However, its choice of the bigger of two options -- some had expected a 25-basis-point cut -- split opinion, with some warning it could reignite inflation, while others said it showed the bank was keeping ahead of the curve in supporting the economy in light of weak jobs data.

The bank's "dot plot" guidance indicated another 50 points of reductions before January, followed by 100 next year and 50 in 2026.

After the meeting, Fed boss Jerome Powell said the economy was in "good shape", pointing to lower inflation and solid growth.

"The labour market is in a strong place. We want to keep it there," he told reporters.

But he cautioned that the central bank would "go carefully" and weigh the matter "meeting by meeting" as it looks to keep easing.

"It is time to recalibrate our policy to something that is more appropriate, given the progress on inflation, and on employment moving to a more sustainable level," he added.

Equities have rallied through the year on expectations the cycle of tightening, which started in 2022, would come to an end this year as inflation slows and the labour market softens.

But, after an initial burst higher following the announcement -- pushing the S&P 500 to a new record -- Wall Street retreated and ended in the red.

Analysts pointed out that investors had largely factored in 125 points of reductions this year, so a correction in valuations was to be expected.

Christian Hoffmann at Thornburg Investment Management said "the Fed must have grappled with concerns not just about doing too much versus too little, but also concerns about signalling to markets, and perhaps more subtly, political optics".

"With the market almost evenly split between a 25 basis point and 50 basis point cut, hopes were bound to be dashed," he added, noting equities were already riding high.

Asian markets brushed off the weak US lead and mostly rose, with Tokyo piling on more than two percent as the yen hit almost 144 per dollar, a level last seen at the start of the month.

Hong Kong, where the de facto central bank lowered its own rates owing to the city's currency peg to the dollar, also rallied more than two percent, while Shanghai, Sydney, Singapore, Mumbai, Bangkok, Wellington, Taipei, Manila and Jakarta also advanced.

London rallied at the open ahead of a Bank of England policy decision that is expected to see it stand pat, while Paris and Frankfurt also surged.

Gold sat around $2,500 after briefly breaking above $2,600 to a new record after the Fed news, as the prospect of lower rates makes the precious metal more attractive as an investment.

Analysts at HSBC Global Research said they saw 25-point cuts at the next six meetings, with a possible 50-point reduction in November, adding that a "risk for 2025 is that the path of the economy and prospective Fed easing could be influenced by policy choices made as a consequence of the US election outcome".

Investors are now turning their attention to the Bank of Japan's policy meeting, which concludes Friday and is expected to see officials stand pat, having sent markets into turmoil last month with a surprise hike -- after doing so earlier this year for the first time since 2007.

- Key figures around 0710 GMT -

Tokyo - Nikkei 225: UP 2.1 percent at 37,155.33 (close)

Hong Kong - Hang Seng Index: UP 2.2 percent at 18,047.59

Shanghai - Composite: UP 0.7 percent at 2,736.02 (close)

London - FTSE 100: UP 0.9 percent at 8,326.54

Dollar/yen: UP at 143.41 yen from 142.29 yen on Wednesday

Pound/dollar: UP at $1.3244 from $1.3207

Euro/dollar: UP at $1.1137 from $1.1120

Euro/pound: DOWN at 84.09 pence from 84.17 pence

West Texas Intermediate: UP 0.4 percent at $71.20 per barrel

Brent North Sea Crude: UP 0.6 percent at $74.09 per barrel

New York - Dow: DOWN 0.3 percent at 41,503.10 (close)

F.Edwards--SFF