By Linh Tran, Market Analyst at XS.com
Dow Jones (US30) closed yesterday’s session with a gain of 0.57%, marking a solid recovery after several bouts of volatility. The main driver came from the market’s reception of the Federal Reserve’s decision early this morning: cutting interest rates by 25 basis points, bringing the federal funds rate down to 4.25% from 4.50%. This move had been widely anticipated by the market, but the accompanying message is what sets the tone for the next trend in U.S. equities.
In its statement, the Fed acknowledged that inflation still shows “persistent” signs as August CPI rose 0.4% m/m (versus the forecast of 0.3%) and CPI y/y stood at 2.9% (up from 2.7%). However, signs of cooling on the production side, with PPI falling 0.1% m/m, together with Michigan consumer sentiment plunging to 55.4, gave the Fed more room to initiate an easing cycle. Even so, Chair Powell emphasized during the press conference that the Fed remains “data-dependent” and will assess the pace of cuts based on core inflation and labor market data, rather than committing to an aggressive rate-cutting path immediately.
For the Dow Jones, the rate cut decision brought multiple positive effects. Lower capital costs provide support to sensitive sectors such as industrials, financials, and consumer staples. Meanwhile, technology and communication services (though not as heavily weighted as in the S&P 500) still created a spillover effect on sentiment, driving broader buying momentum. The Dow’s rebound was also reinforced by solid Retail Sales data, with the core measure up 0.7% m/m, reflecting resilient household spending that supports revenues for many of the index’s constituents.
However, the contrasting signals cannot be overlooked. The Empire State Manufacturing Index stood at -8.7, well below the forecast of +4.3, indicating ongoing weakness in the factory sector. At the same time, higher-than-expected consumer inflation means the Fed cannot yet “green-light” a rapid and deep rate-cutting cycle. This is why real yields have not fallen sharply, and the U.S. dollar has retained part of its strength, limiting an overly aggressive breakout in equities.
On the risk side, the global geopolitical landscape continues to amplify volatility. Israel’s ground offensive in Gaza City and Russian UAV incursions into NATO airspace could reignite risk-off sentiment at any moment. For the Dow — an index with heavy exposure to industrials, healthcare, and financials — such geopolitical shocks often trigger sharp sectoral divergence, with defensive names attracting flows while cyclical sectors come under pressure.
Overall, the short-term outlook for the Dow Jones after the Fed’s rate cut leans toward cautious optimism. The index has a chance to extend its rally if core inflation data continues to ease and the Fed signals a dovish stance in upcoming updates. However, since Powell maintained a prudent tone, the likelihood of the Dow remaining range-bound persists until the market receives clearer evidence that the Fed is ready to accelerate the easing cycle.