We went from ‘the Federal Reserve (Fed) could hardly cut in September’ to ‘it would be a mistake not to cut in July or September’ (source: Mohammad El Erian’s LinkedIn feed) in the blink of an eye. Everything seems upside down since last week. The Big Tech stocks that have been rallying relentlessly since the beginning of 2023 are hit hard by rapid outflows as worries regarding the AI spending and the realization that it may take time to see the benefits of this massive spending push investors to take a part of their profits and walk away.
Walk away where?! Walk away toward the treasuries and government bonds with the expectation that the Fed and other central banks will either start or continue cutting their rates, and walk away toward the smaller and cyclical pockets of the equity markets. In this context, we’ve been seeing the lower and countered by a rise in economically sensitive sectors since about two weeks now.
And diving into the S&P 500, around 300 of the stocks in there gained yesterday, rebounded after testing the $77pb support, and the stocks rallied 1.26% – reinforcing the rotation trend – from tech to non-tech – after the latest growth update showed that the US economy not only secured a 2% growth but grew at an impressive pace of 2.8% last quarter – double the first quarter number which had seen the growth rate fall to 1.4%.
Consumer spending grew 2.3% and helped keep the US economy on a strong path – although the savings are melting and credit card debt is rising to levels not seen in a decade. prices eased from 3.7% to 2.9% during the quarter. Although the easing in prices was not as much as analysts expected, the Fed rate cut expectations didn’t really got hurt by the strong numbers as again, it’s now thought by some big names that not cutting rates in one of the two next meetings would be a policy mistake for the Fed.
I personally think that cutting rates next week would be a mistake too, given the still-strong inflation and unbelievable growth numbers. Presently, activity on Fed funds futures don’t show a…
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