Is the Fed about to make a big move? Market bets on a 50 basis point rate cut, tech stocks and junk bonds are partying!

According to the Vast Finance app, the market generally expects Federal Reserve Chairman Jerome Powell to take decisive monetary policy actions. Traders are closely watching this and starting a new round of bets, hoping for a soft landing of the economy. This week, enthusiasm in the technology stocks, cryptocurrency, and junk bond markets has once again heated up. Fund managers' confidence has been boosted as they anticipate policymakers may rarely cut interest rates by half a percentage point. After a significant drop in the Nasdaq 100 index the previous week, it rose nearly 6% for five consecutive days this week, indicating a market reversal trend.

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This is the latest turning point in the recent market narrative. After almost succumbing to expectations of an economic recession, stock traders are starting to believe that growth is sustainable, especially with the anticipated arrival of loose monetary policy. Some optimistic investors even see an ideal investment environment: an active Federal Reserve that may inject vitality into the still expanding economy through significant interest rate cuts.

Priya Misra, portfolio manager at Morgan Stanley Asset Management, said, "For the stock market, the best scenario is a good economic situation combined with lower interest rates. A 50 basis point rate cut is good news, indicating that the Federal Reserve does not want to lag behind the situation."

On Friday, the futures market once again saw bets on a significant cut in benchmark interest rates, while just a few days ago, the market believed that a rate cut was unlikely. This shift has driven strong gains in stocks seen as beneficiaries, including value stocks, small companies, and high dividend companies, while the US dollar has weakened.

It is understood that ahead of the Federal Reserve meeting on September 17-18, the debate over the magnitude of its first rate cut intensified. Pricing in the futures market shows that the probability of a 50 basis point rate cut has risen to 43%, up from 25% a few days ago, but down from close to 60% probability a week ago.

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Currently, the interest rate futures market expects the highest probability of a 100 basis point rate cut by the end of this year, and further expects a 150 basis point cut by 2025. Economic forecasts for September are likely to imply more easing than in June, mainly in response to deteriorating labor market conditions. In June, officials' median forecast indicated that the unemployment rate would reach 4% by the end of this year. However, the unemployment rate in July had already reached 4.3%, slightly dropping to 4.2% in August The S&P 500 index rose by 4% in the past five trading days, marking its best weekly performance since November, and is now less than 50 points away from the historical high set in July. The junk bond market also saw an increase, with a major exchange-traded fund ending a two-week decline.

However, this week saw gold prices hitting a historic high, while the 10-year US Treasury bond yield reached a 15-month low, both of which can be interpreted as signals of economic deterioration. Despite consumer price data exceeding expectations and a relatively healthy labor market, this suggests that future monetary policy should proceed with caution. Former New York Fed Chair William Dudley and economists like Michael Feroli from JP Morgan believe that the Fed should further cut interest rates to avoid falling behind the situation.

Feroli wrote in a report on Friday, "What the Fed should do next week seems clear to us: cut the policy rate by 50 basis points to accommodate the evolving risk balance."

Raphael Tufano, Head of Capital Markets Strategy at Tikehau Capital, stated that the Fed is treading a delicate path. "A 50 basis point rate cut by the Fed to address economic weakness may disrupt the market and could lead to volatility before the year-end," he said. "On the other hand, if the 50 basis point cut is in response to favorable inflation data, and central bank officials also provide reassuring communication, it may boost risk assets."

Regardless of how policymakers act, Doug Ramsey, Chief Investment Officer at Leuthold Group, doubts whether the stock market's bullish celebration can last long. He pointed out that the unique characteristics of the current rise in risk assets may indicate a shorter lifespan, including valuations that have never been reset due to a comprehensive economic downturn.

Leuthold's data shows that out of the past 12 bull markets, only 4 started outside of an economic recession, with an average duration half that of other bull markets. In a report, he wrote, "Bull markets lacking the traditional 'father figure' of a recession tend to have shorter lifespans than genetically superior bull markets, with the S&P 500 rising only a third as much as the former." "If the current bull market matches the average performance of the previous four most cyclical bull markets, it will last until May 2025, with the S&P 500 reaching a peak of 5,852 points - about 8% higher than the closing price on September 6. Not great."

Hedge funds are also cautious, with Morgan Stanley's brokerage team reporting that hedge funds have reduced their net equity exposure to the lowest level since the end of last year. EPFR Global data compiled by Bank of America shows that overall market positioning has become more cautious, with US stock funds experiencing the largest weekly outflow since April.

Skeptics also point out that the speed of interest rate changes reflected in federal funds futures - exceeding two percentage points over the next 12 months - is rarely seen outside of an economic recession. James St. Aubin, Chief Investment Officer at Ocean Park Asset Management, said, "With the S&P index nearing historical highs and credit spreads narrow, the Fed's initiation of a rate-cutting cycle on a massive scale seems to only happen when the Fed knows something that others don't." I believe that a 50 basis point rate cut may do more harm than good to market sentiment. If necessary, there is still a lot of room for further rate cuts in the future. We just haven't reached that point yet