FOMC Preview: How Might Markets React After The Widely Expected Rate Cut

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FOMC Preview: How Might Markets React After The Widely Expected Rate Cut

seekingalpha09-15

Stock markets rallied last week, with the S&P 500 gaining 4.01% and the Nasdaq rising by 5.94%, ahead of the FOMC meeting.CME FedWatch predicts a 50/50 chance of a 25 bps or 50 bps rate cut, with a ...

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Carey Inc","IWM":"罗素2000指数ETF","FXY":"日元ETF-CurrencyShares","O":"Realty Income Corp","LU2357305700.SGD":"Allianz Global Artificial Intelligence ET H2-SGD","ALLY":"Ally Financial Inc.","FOMC":"FOMO CORP.","SRTY":"罗素2000指数三倍做空ETF-ProShares","F":"福特汽车","CI":"信诺保险","RWM":"罗素2000指数反向ETF","UWM":"罗素2000指数ETF两倍做多","IWN":"罗素2000价值股指数ETF-iShares","LU0107464264.USD":"abrdn SICAV I - GLOBAL INNOVATION EQUITY \"A\" (USD) ACC","STLA":"Stellantis NV","TSLA":"特斯拉","IWO":"罗素2000成长股指数ETF","TZA":"罗素2000指数三倍做空ETF","BK4585":"ETF&股票定投概念"},"translate_title":"FOMC前瞻：市场在普遍预期的降息后可能会有何反应","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"HUM":1,"MOH":1,"ALLY":1,"O":1,"STLA":1,"UNH":1,"US10Y.BOND":1,"US12M.BOND":1,"US2Y.BOND":1,"US30Y.BOND":1,"US3Y.BOND":1,"FXY":1,"US5Y.BOND":1,"US6M.BOND":1,"FOMC":1,"F":1,"ELV":1,"CI":1,"US7Y.BOND":1,"WPC":1,"NVDA":0.8,"QQQ":0.7,"IWM":0.7,"TZA":0.6,"UWM":0.6,"US912797HE00.BOND":0.6,"US912797GW17.BOND":0.6,"MNQmain":0.6,"MRTYmain":0.6,"IWN":0.6,"IWO":0.6,"TWM":0.6,"TSLA":0.6,"SRTY":0.6,"RWM":0.6,"RIVN":0.6},"content_text":"Stock markets rallied last week, with the S&P 500 gaining 4.01% and the Nasdaq rising by 5.94%, ahead of the FOMC meeting.CME FedWatch predicts a 50/50 chance of a 25 bps or 50 bps rate cut, with a higher likelihood of a 25 bps cut.Lower rates are expected to stimulate sectors like real estate, automotive, and healthcare, with REITs and automotive stocks already reflecting these expectations.A 25 bps rate cut is anticipated, but a 50 bps cut could signal financial instability concerns, particularly for smaller banks.   Skyhobo Last week, stock markets staged their best rally of the year ahead of the Federal Open Market Committee (“FOMC”) meeting this week. The S&P 500 (SP500) enjoyed a V-shaped rebound by gaining 4.01%. The Nasdaq (QQQ) performed even better, rising by 5.94%. Investors put aside their fears from August, when Japan’s carry trade panic spread to U.S. markets. Buyers did not hesitate to buy small-cap stocks, either. The Russell 2000 (IWM) added 4.3%. The pre-rally before the FOMC meeting on September 17-18, 2024 may end up adding beta risks for traders. If markets have a “sell the news” moment on Wednesday, the more volatile companies would fall more than the indices. What should markets expect the Fed to announce this week? What CME FedWatch Predicted At the time of writing, the CME FedWatch has a 50/50 probability for either a 25 bps or 50 bps rate cut. The chances of the former fell by 20% from the September 6, 2024 reading. CME FedWatch  This historical rate chart shows the Fed is highly unlikely to keep rates unchanged. CME FedWatch  The prediction for a 475 – 500 Fed Fund rate is highly volatile. Markets predicted an 80% chance of a 50 bps cut during Japan’s Nikkei sell-off. On August 5, 2024, the index fell by 12.4%, a drop not seen since Black Monday in 1987. The month before (in July), the Japanese Yen (FXY) fell to a multi-decade low. The FXY ETF closed at $57.17. CME FedWatch  When the Bank of Japan reacted by delaying its interest rate hike, markets snapped back. On September 13, the BOJ said it would not raise interest rates this week. Instead, it will hike rates at a predictable pace. Senior economist Junki Iwahashi thought that the bank would raise rates once every six months. One-Quarter Percent Rate Cut Expected On August 23, Fed Chair Powell delivered a speech at the Kansas City Fed’s Jackson Hole Economic Symposium. Powell said, \"The time has come for policy to adjust.” No reader should have any doubt that the Fed no longer has a policy that focuses on lowering inflation. It now has a dovish policy. Traditionally, a dovish monetary policy would favor easy money policies. However, the U.S. federal government continues to exercise fiscal policy that increases its budget deficit. Though it is out of the Fed’s control, the $380.0 billion excessing spending is inflationary. In August, the Bureau of Labor Statistics reported that the Consumer Price Index increased by 0.2% M/M. CPI cooled to 2.5% from last year. Readers should expect that the Fed will not wait for August’s Core Personal Consumption Expenditure price index reading. In July, the Fed’s preferred gauge to measure underlying inflation fell to 2.6%. The core PCE is substantially lower than the 3.726% reported last August 2023. Tradingeconomics The 60 bps difference from the 2.0% target is not big enough for the Fed to hold off in cutting rates. Earlier this month, the BLS posted total nonfarm payroll employment rising by 142,000. However, the rising employment slowed sharply compared to 2022 and 2023.   Bureau of Labor Statistics While jobs increased slightly sequentially in August, the economy is no longer hot enough to increase employment. The Fed will likely preempt a sudden, unexpected drop in employment growth by loosening credit conditions. Even though the unemployment rate of 4.2% fell from the previous month, the 10 bps decline is small. The Fed’s gradual rate cut is not likely to send the unemployment rate down to the 3.5% last seen in 2023.   BLS Impact on Fiscal Deficit The Fed’s monetary policy has a limited ability to influence the rising U.S. fiscal deficit. Last year, the country’s $1.7 trillion fiscal deficit equaled 6.3% of gross domestic product. In its August 14, 2024 report, the Congressional Budget Office released an updated budget baseline. It projected that the budget deficit would reach $1.9 trillion in FY2024. From the Bipartisan Policy Center’s tracker below, deficit spending is below that of the pandemic years (2020-2021). That resulted in some of the total inflation consumers see today. Bipartisan Policy Center’s  Investors who held positions in sectors that benefited from government spending fared well. In July spending for Social Security, Medicare, and Medicaid increased by 7% to $152 billion. UnitedHealth (UNH), Cigna (CI), and Elevance Health (ELV) fared well this year. Molina (MOH) is flat YTD while Humana (HUM) underperformed. Humana reported weak Q2 results. Medical costs in its Medicare Advantage business are higher than planned. If the Fed cuts rates, it will lower the cost of servicing the national debt. In July, net interest payments increased by 38% to $216 billion. While its debt burden growth added to those costs, higher rates also had an impact. Lower rates should stimulate the economy. This will increase the government’s revenue collected from income tax. In July, the BPC reported revenue of $4.1 trillion. Individual income and payroll tax revenue grew by 9% to $296 billion. Rate Cut Impact on Several Sectors REIT investors should expect real estate valuations to rise as the Fed rate, and consequently mortgage rates, fall. Unfortunately, the widely-held REITs like Realty Income (O) and W. P. Carey (WPC) bottomed in July. The strong rally continued since then. Last Friday, Realty Income stock closed at 1.07% below its 52-week high. Automotive stocks are supposed to rebound after the Fed’s new policy. Lower rates for automotive loans would stimulate sales. Again, markets already priced in this scenario by bidding up shares of Tesla (TSLA). By comparison, Rivian (RIVN) did not move anywhere since August. Investors are not convinced that ramping up R1T manufacturing will lower the loss per vehicle. Additionally, Rivian’s supply constraints may result in the firm posting another loss next quarter. Ford (F) and Stellantis (STLA) may enjoy a relief rally but prospects remain poor. The firms bet on the willingness of consumers to buy trucks, which are up to $84,495. When customers resorted to Ally Financial (ALLY) for a car loan, credit challenges intensified. Ally will likely need to raise its loss reserves after reviewing them. Your Takeaway Readers should not underestimate the impact of the FOMC meeting on stock markets. FedWatch predicts a strong probability of a 25 bps rate decrease. Although a 50 bps cut is possible, such a jumbo cut would raise serious questions. A rate that big is an abrupt reversal from holding rates for all those months. It would imply that the Fed is worried about a financial crisis, possibly for smaller banks. The Treasury bond yields are already priced in for steady rate cuts through 2025. Seeking Alpha  Yields are now at 52-week lows for the three-month T-bill (US3M) through the 30-year bond (TLT)","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"Policy And Regulatory,analysis","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"hasMoreComments":false,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false}}