Broad Market to Fed, Rate Cut Wanted…


The FOMC meeting next week is shaping up as pivotal for Wall Street, with stocks primed for a selloff should the Fed fail to take an even more Dovish tilt after policymakers raised expectations for a rate cut in recent weeks.

The benchmark S&P 500 has rallied more than 5% so far this month as softening economic data coupled with comments by Fed officials heightened expectations the Fed will cut rates by the end of the year and, at the least, telegraph it is leaning toward a later rate cut at next week’s 18-19 June meeting.

The gains came on the heels of a selloff in May of nearly 7% in the S&P driven by investor concerns that trade disputes were escalating, slowing the economy and putting it at risk of falling into recession.

Bets for a rate cut were amplified by comments from Fed Chairman Powell on 4 June, who said the central bank will respond “as appropriate” to the risks from a global trade war and other developments, and after a weak May NFPs report on 7 June

Bank of America Merrill Lynch(BAC) Chief Economist expects the Fed’s “dot plots” projection of interest rates, which represents the anonymous, individual rate projections of Fed policymakers for the next few years, to shift lower as officials start to factor in cuts. However, “the median dot will signal a Fed on hold,” she said in a Note.

The market has somehow convinced themselves that we are in an easing cycle. I am not sure how we got so far ahead of ourselves,” said chief market strategist at National Securities in New York.

“So now you’ve got Powell is kind of painted into a corner that he is really going to have to navigate carefully because you have market expectations that he said he would do whatever is appropriate.”

In a recent note to clients, Goldman Sachs (GS) economist said one of the themes from recent Fed commentary is that there is a wide range of views from central bank officials, although most “indicated trade policy increased downside risks by increasing uncertainty” and the result of ongoing trade negotiations was highly uncertain.

Many investors were looking toward the G-20 Summit later this month for more definitive signs of the direction of trade talks between the United States and China, giving the Fed a clearer picture on whether to take action on rates at the July meeting.

According to CME’s FedWatch tool, money market traders are pricing in an 88.4% chance of a rate cut of at least a Quarter of a percentage point in July.

Economic data this week was mixed, with retail sales topping expectations and halting a tide of weak indicators, including the payrolls report and readings on inflation in the form of May consumer and producer prices with implications for core personal consumption expenditures, the Fed’s favorite inflation measure.

“There were some important prints that confirmed some of the Fed’s fears – we did not get PCE but in PPI and CPI, you are not seeing inflation pressure bleeding through,” said a senior investment strategist at U.S. Bank Wealth Management in Seattle.

Still, a cut at the June meeting has not been ruled out, with the probability of a Quarter point cut put at 24.2%, according to FedWatch.

Vanguard believes the Fed could implement an “insurance cut” as early as next week, according to the firm’s global chief economist.

So, it is not surprising investors are willing to cheer a rate cut.

According to the chief investment strategist at CFRA Research in New York, of the past 16 rate cut cycles going back to Ys 1946, the S&P 500 has climbed an average of 10.3% in the 6 months after the 1st rate cut and 14.1% in the 12 months after.

But, cuts did not always precede a market boom, with declines coming 5 times in the 6 months following a new rate cut cycle, including the most recent ones in Ys 2007 and 2001.

On the other hand to some analysts and investors any hope for a rate cut is misguided given the current economic and market environment.

So, we wait, we see.

HeffX-LTN’s overall technical outlook for the S&P 500 at the week ended 14 June 2019 is Bullish.

Have a terrific weekend