On the eve of the September meeting of the Federal Reserve, a report ignited expectations of a 50 basis point rate cut, small-cap stocks surged, and gold hit a new high

With only a few days left until the Federal Reserve announces its monetary policy meeting decision next Wednesday, the financial markets are once again warming up to the expectation of a significant rate cut by the Fed. On Friday, bond traders estimated a 40% probability of a 50 basis point rate cut by the Fed, far exceeding the 4% earlier in the week. Futures tied to the Fed's policy rate showed that traders now expect a 50 basis point rate cut to be around 47%, almost evenly split, compared to the approximately 28% probability estimated on Thursday. Some media outlets pointed out that the U.S. core CPI growth in August, released on Wednesday, was stronger than expected, and the U.S. labor market remains relatively strong. These signs almost completely dispelled traders' belief in a significant rate cut by the Fed. The shift in their stance on Friday was influenced by a report published by The Wall Street Journal on Thursday, which stated that Fed policymakers are considering whether to make a standard 25 basis point cut or a larger 50 basis point cut. The above report is the analysis article mentioned by "New Fed News" - Nick Timiraos. The article stated that the recently released data has been "mixed," with neither inflation nor employment data decisively supporting a rate cut. Starting with a 25 basis point cut is the least resistant path, as it can avoid causing market panic from a significant cut and the challenge of explaining such a move before the election. However, if the Fed expects a total cut of 100 basis points this year, starting with 25 basis points may be a bit awkward: if a larger cut is expected later in the year, why not take action sooner? Some media also pointed out that Bill Dudley, former Vice Chairman of the Federal Reserve and former President of the New York Fed, fueled expectations of a significant rate cut in a speech at a forum in Singapore on Friday. Dudley said, "I think there is a good case for a 50 basis point cut regardless of whether they (the Fed) cut rates." Dudley mentioned that the current rates are 150-200 basis points above the so-called neutral rate that neither restricts nor eases the economy, so the question is: "Why not start acting?" The expectation of a 50 basis point rate cut reignited market rotation in U.S. stocks on Friday, with investors shifting to stocks that would benefit the most from Fed monetary easing. A clear sign of rotation is that small-cap stocks outperformed large-cap stocks. While the S&P and Nasdaq only rose by less than 0.9% intraday, the Dow rose by nearly 1.1% when hitting a daily high, small-cap value stocks represented by the Russell 2000 rose by over 2% at midday, hitting a high of over 2.5%. Jonathan Krinsky, Managing Director and Chief Market Technician at BTIG, commented: "The biggest news in the past 24 hours is the change in the likelihood of a 50 basis point rate cut by the Fed next week. Small-cap stocks have provided better risk/reward in the short term, and we believe that blue-chip tech stocks may take a temporary pause again, although they will certainly participate if the S&P 500 hits a new high." Bryan Whalen, Chief Investment Officer of TCW Group, said, "If the Federal Reserve cuts interest rates by 25 basis points next week, they will be behind the curve." He stated that if unexpectedly weak US retail sales data is released before the end of next week's Fed meeting, the momentum for a 50 basis point rate cut next week will increase. "If they only cut rates by 25 basis points, this is more favorable for the bond market, as it means the Fed will have to take more aggressive measures in the future." Expectations of a significant rate cut have heated up, with US bond yields generally falling on Friday and the US dollar weakening. The 2-year US bond yield, which is more sensitive to interest rate prospects, briefly fell below 3.57% during the session, approaching the intraday low set on Wednesday, the lowest since September 2022. Rate cuts are positive for gold, with gold prices hitting a historical high for the second consecutive day. While US stocks hit intraday record highs again at midday, spot gold rose above $2586, up over 1% intraday, and New York gold futures rose above $2610, up 1.3% intraday