To The Moon

The current setup in global markets is delicately poised — and investors are right to weigh whether policy easing is nearing its limit and whether sentiment has turned euphoric. Let us examine the scenario systematically:

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1. Probability of Another 25 bps Cut in October

The September rate cut (−25 bps) marked a cautious pivot by the Federal Reserve, intended to support slowing growth while acknowledging residual inflation pressures.

Current data mix: Core inflation remains sticky (~3.1–3.3%), while labour-market indicators are softening (rising jobless claims, slower payroll additions).

Fed officials’ rhetoric: Recent speeches have leaned data-dependent rather than overtly dovish.

Market pricing: Fed funds futures currently imply roughly a 40–45% probability of another 25 bps cut in October — not a certainty.

Base case: the Fed will pause in October to assess the cumulative impact of easing, unless inflation data weakens sharply before the meeting.

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2. Market Dynamics for the Week

a. Fed minutes (Wednesday–Thursday)

Traders will scrutinise whether dissent among FOMC members was significant. Any hint that more cuts were discussed could trigger short-term equity strength and Treasury yields softening.

Conversely, if minutes show concern about “too-loose” financial conditions, equities could retrace modestly.

b. Powell’s Thursday speech

A neutral tone could stabilise markets after the recent rally.

Any dovish nuance—such as emphasising “downside risks to employment”—could reignite risk-on sentiment, especially in tech and cyclicals.

Expected range:

S&P 500: mild consolidation between 5,500–5,650.

10-year yield: likely capped near 3.85%.

Gold: supported above US $3,950 amid rate-cut expectations and shutdown uncertainty.

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3. “Irrational Exuberance” Risk

Yes, there are early signs of speculative froth:

Multiple AI and chip stocks are trading at valuations exceeding 30–40× forward earnings.

Retail inflows into leveraged ETFs and weekly options have spiked.

Volatility indices (VIX < 12) suggest complacency, not fear.

However, the exuberance is still sector-specific—concentrated in megacap tech and AI-linked plays—rather than broad-based mania across all asset classes. Institutional positioning remains moderately risk-on but not extreme.

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4. Outlook

Base case: sideways to slightly bullish market this week, supported by liquidity and rate-cut optimism.

Key risk: a hawkish surprise in the minutes or from Powell could trigger a brief rotation into defensives and a 2–3% equity pullback.

Macro bias: soft-landing narrative still intact; but valuations warrant caution.

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Summary:

> Another 25 bps cut in October is possible but not assured.

This week’s tone will hinge on the Fed minutes and Powell’s speech.

The market’s mood is optimistic—yet bordering on selective exuberance, not full-scale irrationality… at least, not yet.