5 Things You Need to Know to Start Your Day: Americas

Good morning. It is (finally) Fed day and markets are in a cautious mood. Meanwhile, big names are warning against getting too excited. Here [View in browser]( [Bloomberg]( Good morning. It is (finally) Fed day and markets are in a cautious mood. Meanwhile, big names are warning against getting too excited. Here’s what traders are talking about. — [David Goodman]( Want to receive this newsletter in Spanish? [Sign up to get the Five Things: Spanish Edition newsletter](. Fed day The day investors have been building up to for weeks (if not months), is finally here, with the Federal Reserve widely [expected to lower interest ratesÂ]( holding borrowing costs at a two-decade high for more than a year. The bigger question is not if they will cut, but by how much --investors see better-than-even odds of a half-point adjustment, with forecasters favouring a 25-basis-point move. Markets waver Ahead of the decision,  stocks [struggled for direction]( as a watchful tone spread across global markets. Futures contracts on the S&P 500 and Nasdaq 100 are slightly higher, while health care stocks are leading Europe’s Stoxx 600 index lower. The dollar weakened and Treasury yields ticked higher. Warnings abound Still, the day is kicking off with a couple of warnings. Daniel Ivascyn, who runs the world’s largest actively managed fixed-income fund at Pacific Investment Management Co., says the bond market has [priced in too many cuts]( expectations are vulnerable if inflation resurges. Meanwhile, Bridgewater Associates founder Ray Dalio says the size of the cut this week [won’t be a game changer for global investors.]( Bitcoin bull Hedge fund manager Anthony Scaramucci [projected record highs for Bitcoin]( fueled by a combination of interest-rate cuts and US regulatory clarity for crypto in the wake of November’s presidential election. “We are going to get pro-cryptocurrency, Bitcoin, and stablecoin legislation in the first part of the next congressional term in the US,” the founder of SkyBridge Capital said in an interview. “At the same time, you’re intersecting with rate cuts from the Federal Reserve.” Google victory Meanwhile,  Google [won a court fight]( the European Union over a €1.5 billion ($1.7 billion) fine for thwarting competition for online ads, partly atoning for last week’s crushing defeat in a separate judgment for abusing its monopoly powers. Judges at the EU’s General Court in Luxembourg backed the Alphabet Inc. unit’s challenge to a fine doled out in 2019. Alphabet shares edged higher in pre-market trading. What we’ve been reading This is what’s caught our eye over the past 24 hours. - UK inflation[holds at 2.2% in August](. - Millennium, Citadel breed a [$14 billion pack of hedge fund cubs](. - Steve Cohen [stops trading for Point72,]( marking end of an era. - [London’s prime mansions aren’t selling]( amid UK budget worries. - Andrea Felsted says [Burberry needs the return of Britpop.]( And finally, here's what Mark’s interested in this morning Traders should prepare for a counterintuitive response to the Fed actions today. If officials reduce interest rates by 50 basis points, it’s a strong reiteration of the committee’s very dovish reaction function, and where its priorities lie on its dual mandate of promoting both maximum employment and stable prices. It will extend the economic cycle and send a message of complacency on inflation. US 10-year yields will climb in the subsequent months as a result, just like what happened in the wake of the Fed’s [surprisingly dovish pivot]( in December 2023. The dollar will remain in a volatile downtrend overall, undermined by the Fed’s dovish reaction function, the hit to policy credibility and upcoming political noise, but intermittently supported by a steeper yield curve and bouts of risk-aversion The stock rally will broaden out, with the rest of world outperforming US stocks. Obviously, an aggressive cut that is delivered as being proactive and pre-emptive is more bullish for stocks and bearish for bonds than one that is accompanied by a sense of panic or intensified concern. Conversely, if the Fed reduces by 25 basis points, it will be a major risk-aversion event, as it would disappoint all major markets at once (stocks, bonds, credit, emerging markets) while upsetting the recent trend for dollar weakness. Volatility will surge, as a tightening shock is always more impactful than an easing surprise. If the smaller-than-expected hike is accompanied by dovish forecasts and dot plot, then dollar strength won’t sustain for long, due to the hit to policy credibility. If the rate move is validated by optimistic forecasts and dot plot, then bonds suffer badly, the volatility impact sustains and dollar surges on combination of risk aversion and yield support. US stocks would suffer immensely in subsequent days/weeks but the longer-term bull market shouldn’t be derailed if the message is that the economic cycle isn’t over. Bloomberg Economics argues the Fed will provide a bullish half-point cut. For the little it’s worth, I agree. Even though I’m much more positive than most on the US economy and believe that the Fed won’t cut rates nearly as much as priced over the next year, it would be much more problematic and damaging to growth and policy credibility to disappoint today. Mark Cudmore is the executive editor for Bloomberg's Markets Live blog. Like Bloomberg's Five Things? [Subscribe for unlimited access]( to trusted, data-based journalism in 120 countries around the world and gain expert analysis from exclusive daily newsletters, The Bloomberg Open and The Bloomberg Close. [Bloomberg Markets Wrap: The latest on what's moving global markets. Tap to read.]( Follow Us Stay updated by saving our new email address Our email address is changing, which means you’ll be receiving this newsletter from noreply@news.bloomberg.com. 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