How have major assets performed historically before and after the Fed’s “first rate cut day”?

```

Historically, U.S. stocks and bonds tend to rise before and after the Fed’s first rate cut, the dollar usually weakens before rate cuts, and gold performs strongly prior to the official implementation of easing policies. This is the view of Citi's latest report, which provides a trading roadmap for the anticipated new round of rate cuts.

According to "Chasing Wind Trading Desk" news, as market expectations for the Fed to start cutting rates this Wednesday heat up, Citi’s Alex Saunders team predicted in a report on the 16th that, based on downside risks to employment, the Fed will announce a 25 basis point rate cut and signal further easing. This expectation forms the baseline scenario for current market pricing.

However, history does not simply repeat itself. Strategists in the report believe that, during the 2024 rate cut cycle, the performance of most assets aligns with historical patterns, but bonds are a notable exception—their prices peaked at the time of the first rate cut. Nevertheless, this time is different because current pricing for the rate cut range is far less aggressive than in 2024, which reduces the risk of another sharp drop in bond prices.

In addition, Citi believes that, against the backdrop of the ongoing AI-driven capital spending boom, policy easing is likely to support an economic “soft landing”, which is positive for the stock market. The report emphasizes that the current market environment mirrors those with shallow rate cut cycles and soft landing scenarios in history, which could provide more enduring support for bonds in this cycle.

Historical Patterns: Rising Stocks and Bonds, The Dollar and Gold Strong Before Turning Sideways

According to Citi Research, historical data shows that both stocks and bonds have median positive returns before and after the first rate cut. Stocks saw a median gain of about 5% fifty days after the rate cut, but there are downside risks in hard-landing scenarios. Bonds also benefit from expected and actual rate cuts, with yields typically bottoming out around the first rate cut.

The dollar index typically “weakens first then stabilizes,” usually weakening before a rate cut but moving into range-bound trading after the cut. Gold and other precious metals similarly rise before easing policies are introduced, but show more sideways or range-bound behavior after the actual rate cut.

Citi analysts note these historical patterns were essentially validated in 2024, but bond prices peaked around the first rate cut. Back then, the market had priced in rate cuts more aggressively, whereas this cycle’s pricing is relatively moderate, relieving some worries about bonds’ prospects.

Reviewing 2024: Why Did Bonds Underperform Expectations?

The 2024 rate cut cycle provided valuable references for investors, especially regarding the performance of bond markets. According to the report, the 2024 market also expected a "soft landing," but the difference was that the rate cut magnitude priced in by the market was "extremely aggressive."

Report data shows that in 2024, the market priced in as much as 225 basis points of rate cuts, far exceeding the actual three rate cuts. This over-pricing caused bond prices to peak and fall back at the first rate cut. By comparison, the current market is only pricing in 120 basis points of rate cuts, making it more cautious. Citi believes that since pricing is less aggressive, the risk of the bond market repeating last year’s scenario is lower.

The U.S. dollar’s performance in 2024 is also worth noting. While it weakened as expected before the rate cuts, after the cuts, driven by factors such as the U.S. election, its rebound was stronger than historical norms. Citi expects this not to be repeated. Moreover, the current 1-year-1-year forward rate’s low level relative to the macro environment reflects the Fed’s risk reallocation and dovish pricing. This policy bias could further decouple from the macro fundamentals and has the potential to provide more meaningful support for stocks and drive economic reflation.

How Deep Will the Rate Cut Cycle Go? U.S. Stocks and Inflation Are Key Indicators

For investors, the depth of this round of rate cuts is critical. The report analyzes that two key factors will determine the Fed’s room for easing: stock market level and inflation trend.

Historical data shows that when a rate cut cycle begins and the S&P 500 index is at a high (as it is now), the subsequent rate cut cycle tends to be “shallower.” On the other hand, if the broad Consumer Price Index (CPI) drops significantly before the rate cut, the Fed is more likely to pursue aggressive easing.

2024 was an exception in this regard. Despite inflation dropping significantly at the time, it started from a high level, so the eventual rate cut cycle was still shallow. Citi believes that the current market performance matches the script for a shallow rate cut cycle and a soft landing.

Intraday Trading: The “Knee-Jerk Reaction” and Final Move after Decisions Announced

In addition to cyclical patterns, the report also analyzes intraday trading models on Federal Open Market Committee (FOMC) decision days, providing tactical references for short-term traders.

Stocks: Typically exhibit a “knee-jerk” rally after the FOMC statement, especially before the press conference begins. However, this rally is usually completely retraced by the close. The report points out that a negative price reaction in the first 5 minutes after the announcement tends to be more persistent, while a positive reaction easily reverses.Bonds: Contrary to stocks, bond prices’ post-announcement rally tends to “hold,” while sell-offs are prone to reversal. After dovish FOMC meetings, the bond market still has some momentum for further rises over the next 10 trading days.FX: For currency pairs like EUR/USD, “hawkish” FOMC surprises (marked by a notable rise in 2-year U.S. Treasury yields) have the most lasting impact. Data show that after Hawkish FOMC meetings, U.S. dollar strength can last up to 20 trading days, causing EUR/USD to drop by more than 1%.

~~~~~~~~~~~~~~~~~~~~~~~~

The above excellent content comes from Chasing Wind Trading Desk.

For more detailed interpretations, including real-time analysis and frontline research, please join the [Chasing Wind Trading Desk · Annual Membership]

Risk Warning and DisclaimerThe market has risks and investment should be cautious. This article does not constitute individual investment advice, nor does it take into account the special investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, viewpoints, or conclusions in this article fit their own circumstances. Investment based on this article is at your own risk. ```