Stocks are trading higher this morning off the heels of yesterday’s FOMC announcement. While they decided to leave rates unchanged…
However, future rate cuts are on the way… and a lot is going on:
- The 10-year treasury note dropped below 2% for the first time since November of 2016
- Gold prices hit a five-year high…
- The US dollar posted its largest 2-day decline in a year
- Traders are pricing in a 100% rate cut for July’s meeting
Despite all these moving pieces, I have managed to get some trades off… and even book some profits:
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But today is really about digesting what the Fed said. It’s possible stocks have gotten ahead of themselves.
Now, if you’re looking for clues, I’ve pinpointed the data points that the Fed will be watching. That said, when you combine the data with “my money pattern” you have a recipe for explosive returns.
Read on to find out more.
Table of Contents
Fed Recap and What’s Next
The Federal Open Market Committee (FOMC) left rates unchanged – indicating there wasn’t much support for cutting rates in the press conference.
The key takeaways:
- The Federal Reserve removed the word “patient” from its vocabulary.
- They noted the “bankers’ bank” will act as appropriate to sustain economic expansion and keep inflation near its target – no surprise there.
- The vote came in at 9 for leaving rates unchanged, 1 for a rate cut.
- Economic activity is rising at a “moderate rate”.
- Household spending appears to have picked up.
- Inflation will be in focus.
- There are still risks on the table, and the FOMC is continuing with its wait-and-see approach.
Right now, the markets may be focused on the projections that the FOMC released…
Source: Federal Reserve
… and I think traders will need some time to digest all this news… because this move in the market is pretty wild.
As you can see, the Fed is expecting GDP (left unchanged) to come in above their long-term forecast in 2019… and unemployment (lowering the estimate) to be well below the longer run projections.
Not only that, they cut their PCE estimate to 1.5% from 1.8%.
Now, when you look at the dot plot (where FOMC members think interest rates can be)…
… members are looking towards after 2019.
However, as Jerome Powell mentioned… if you focus too much on the dot plots, you’re going to miss the big picture.
So what am I going to do with the FOMC?
Well, the Fed did remove the word patient from its statement. However, Powell did note in the press conference that it will be patient and wait for data…
… so I’m going to do the same… but if I decide to make any moves, I’ll let clients know about them.
Specifically, I’m going to be watching economic indicators like GDP, Consumer Confidence, CPI, PCE, Jobless Claims, Employment Situation, and Consumer Spending, to name a few.
Not only that, I’ll be closely watching the upcoming G-20 Summit, and U.S. – China trade developments.
There Are Cross Currents… and Something Wrong With the Market
One interesting point that the FOMC mentioned was the crosscurrents in trade developments and slower global growth.
Powell noted, “In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective…”
Again, the Fed Chair noted the FOMC will be continuing to wait-and-see for new data points.
Right now, we have a divided Fed… you have some members who think rates should be cut this year, one wants a hike, and the others don’t think they should do anything yet.
If I know anything about studying the Fed… they’re probably not going to make irrational decisions unless a majority comes to a consensus. Until we see that, rates may stay unchanged, unless we get some really weak inflation data – pushing the FOMC to step in.
Now, one thing that could be putting some pressure on the FOMC is Treasury Yield Curve.
Source: St. Louis Fed
Check out the 10-Year and 2-Year Treasury Yield Curve. This spread as been collapsing… and it’s led to some wild moves in the bond market… like the iShares 20+ Year Treasury Bond ETF (TLT) and iShares Barclays 7-10 Year Treasury Bond Fund (IEF).
Last night… we also saw the 10-year Treasury Yield drop below 2% for the first time since 2016… and it could be a signal the bond market is trying to force the Fed’s hand.
So what’s this all mean for the market?
Well, right now it seems to be a good thing if the FOMC does move to cut rates later this year. However, we’re still waiting for a slew of economic indicators… as well as the G-20 summit and more clues about the situation with the trade war.
There seems to be a disconnect between bonds, rates and the overall market right now. If you think about it, when the Fed cuts rates… that means economy is weak… but looking for a rate cut when the market is near highs? That could be dangerous.
Now, I’m going to be closely monitoring market conditions… because it takes time for traders to digest all this news, and sometimes… the first move (following the direction of the market on Fed day) is the wrong move.
That said, I’ll still be looking for trades like this winner in WYNN…
Source: WeeklyMoneyMultiplier.com | Original Link