US stock markets sold off yesterday, as investors trimmed their long positions walking into Federal Reserve (Fed) Chair Jerome Powell’s speech due later today – where he is expected to douse the jumbo rate cut expectations because there is no reason for the Fed to start cutting the interest rates by big chunks in the absence of a severe economic slowdown, market stress, or a crisis.
This is at least what the data suggests and what other Fed members nudge toward, as well. Kansas Fed President Schmid said he would like to see more data points before supporting rate cuts.
Boston Fed’s Susan Collins said that the rate cuts should be ‘gradual and methodical’. And Philadelphia’s Harker made sure that everyone understood that ‘the Fed is going to ease – but no one is portraying a desire to ease bp at this time’.
As such, the rebounded to 4%, the settled near 3.85%, the rebounded from the lowest levels since December and the major US indices fell.
The erased 0.90% while the technology-led lost near 1.70%. The fell almost 1%. Now, everybody is holding his or her breath to hear what Powell has to say, or not say.
The swap markets continue to price in around 95bp cut from the Fed from September to the end of the year. A this-size cut means that the Fed should cut its rates every time it meets this year and cut by 50bp in one of the meetings. From where we stand right now, it seems more likely that this will not happen than the opposite.
Therefore, the pricing must readjust to match at least a 75bp cut by the year end. The real risk here – for the doves – is if the Fed starts cutting rates in September and decides to pause – like did the European Central Bank (ECB) in July for example.
If that’s the case, if there is a pause to Fed rate cuts in November, then the year will end with only a 50bp cut for the Fed – and that could weigh heavier on risk appetite and give a serious positive jolt to the US dollar.
Data-wise
The numbers released yesterday were a mixed bag in the US. The came in as expected, near 230K last week, and rose less…
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