The stock market is brushing up against all-time highs, and the biggest week of earnings season is here, but I want to shift the focus to something that traders aren’t talking about yet.
What am I referring to?
The upcoming Federal Open Market Committee (FOMC) meeting on July 30 and 31, which I believe, will set the tone for which direction the market goes next.
The market is pricing in a 100% chance of an interest-rate cut next week. It’s been like that for weeks, and hence, why the market has rallied over the last few weeks.
Now, the last time the Fed sat down and decided to cut interest rates was 2008, during the financial crisis.
This time, the Fed isn’t waiting for the market to fall off the edge of a cliff before it takes action.
That said, it leaves us with a lot of questions like:
I take a stab at answering those questions and more.
Contents
The Bankers’ Bank is Set to Move the Markets
The Federal Open Market Committee (FOMC) will be announcing its interest rate decision next Thursday at 2:00 PM, as well as comment on the economy and give traders an idea of what to expect.
That in mind, all eyes will be on the Fed the following week… and it could uncover a lot of opportunities in the market.
For the most part, the market is expecting a rate cut.
The market is pricing in a 78.6% chance of a 0.25% rate cut, and a 21.4% chance of a 0.50% chance of a rate cut.
You see, traders are seeing a number of reasons for low-interest rates like:
- Slow global economic growth
- Trade war tensions
- Policy makers to leave the door open for the possibility of further cuts down the road to sustain economic growth
Now, there actually have been some Fed voting members coming out with a dovish tone already.
FOMC Voting Members Pointing to Rate Cuts
For example, St. Louis Fed President James Bullard stated, “I’d like to go 25 basis points at the upcoming meeting…I think the easing cycle is a little bit strong for this situation”
Vice-Chairman of the Fed Richard Clarida also noted, “You don’t need to wait until things get so bad to have a dramatic series of rate cuts… We need to make a decision based on where we think the economy may be heading.”
Moreover, we’ve seen Chicago Fed President Charles Evans noted he would favor two rate cuts before the end of the year.
However, as we know with the Fed… they’re going to be data-dependent and decide on their interest rate decisions… but they’ll let us know what they’re thinking next week.
Right now, traders are looking for clues as to when and by how much the Fed will cut rates… and there are some important data points coming out this week.
With that said, there are some important economic indicators that could sway the FOMC next week.
Economic Indicators to Focus On
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Durable goods orders numbers are being released tomorrow… and the market is looking for New Orders to come in at 0.50%, and Core Capital Goods to come in at 0.20%.
Why does the market care about this?
Well, these indicators give us an idea of how the overall economy is doing. Basically, if durable goods are weak… that means companies aren’t doing as well as the market thinks they are.
In turn, this could push the FOMC to look to cut rates faster… if the numbers come in weaker than expected.
On the other hand, if those numbers are better than expected, it could easily sway the Fed to cut interest rates by fewer percentage points than the market is projecting.
As always, jobless claims will be in play… if those come in weaker than expected… it could be a sign the economy is actually weaker than nearly everyone is saying.
Now, one of the biggest indicators the Fed looks at is the Gross Domestic Product (GDP). Basically, GDP gives the Fed an idea of how fast the overall economy is growing, as well as the current levels of inflation.
If GDP comes in lower than expected… well, look for the Fed to cut rates. But if they come in well above the consensus estimate of 1.9%, then this could cause the Fed to undeliver on its promises for rate cuts.
The Fed is at a crossroad now.
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You see, if the FOMC doesn’t cut rates… it’ll disappoint the market and potentially cause the market to crash.
If the Fed does cut rates and indicate more potential rate cuts… that’s a negative backdrop for the market… and it could cause the market to sell-off. You see, the FOMC doesn’t typically cut rates when the market is near all-time highs.
Why?
Well, if you think about it… rate cuts are typically used then the market is selling off and the economy is weak… think about the rate cuts prior to the recent one… the Fed cut rates back during the financial crisis.
You see, when the economy is weak… rate cuts actually stimulate it… and cause the market to run higher.
But there’s a disconnect now. The market is at all-time highs… and the economy is expected to slow down.
The market is bouncing between $295 and $300… and they’re waiting for the Fed on Thursday… and these indicators will give us an idea of where the Fed could be looking to.
So what kind of trading opportunities will be opening up?
Well, there’s going to be a trade in the SPY, the iShares 20+ Year Treasury Bond ETF (TLT), and precious metals… as well as shipping stocks.
That said, I’m going to be preparing by analyzing the Fed more and looking at the charts, more specifically… the money pattern. Now, I’m going to be giving my best Fed ideas (if I see any) to my clients… and we could potentially see multiple triple-digit winners.
If you’re ready to get started and trade around the Fed with options, and receive real-time text alerts, Mastermind video lessons, and so much more… then click here to see how Weekly Money Multiplier can help you achieve your goals.
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