Stocks closed lower again today, after another large bank came out and said they don’t believe there will be a fed rate cut this year. “We don’t expect a rate cut soon” according to UBS global chief investment officer, Mark Haefele.
It comes a day after Goldman Sachs more or less uttered the same words.
That said, it’s very possible that the market has gotten ahead of itself (the S&P 500 gained 4.4% last week, and the Dow surged by 1300 points, marking the best week stocks have had all year).
And because of that… I’m keeping my trading light this week. And am dedicating more of my time to research, and preparing for the next FOMC announcement which set for June 19th.
But I did manage to sneak in some big wins on Monday… or should I say WYNN’s
(Those profits are twice as large as the price I paid for my first home 20 years ago. If you want to start WYNNING like this, then join WMM today and let’s see how far you can take it!)
Now, traders use the Fed funds futures to gauge whether or not the Fed will cut rates or not.
And as of Monday, the Fed funds futures were implying an 18% chance of a fed rate cut in June. It was also indicating that there is a 50% chance that the Fed cuts rates by 75 basis points by the end of the year.
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Are Traders Putting Too Much Faith in the Fed?
The markets pulled in a bit after a wild rally we had over the last two weeks… and traders are wondering if they should sell the rip or buy the dip.
Now, we might be stuck in a tug-of-war match for a while as the bulls and bears duke it out.
The reason: there are still some big upcoming macro catalysts, namely the FOMC meeting next week… and we’ve already witnessed how the Fed could move markets.
If you remember, Jerome Powell noted the Fed “will act as appropriate to sustain expansion.” What that meant to the market was the FOMC will consider slashing rates if the markets get ugly… which sparked this June rally.
That said, traders might have gotten ahead of themselves buying the dip… because as I know with the FOMC, you’re going to have to wait and see.
You see, there are still a number of economic indicators that are going to be released prior to the FOMC meeting.
Keep An Eye on Economic Indicators
For example, last week, I mentioned traders should be watching the Consumer Price Index (CPI).
Because these economic indicators affect what the Fed will do.
The most recent reading on CPI gave us clues on inflation… which was fairly soft.
The FOMC has stuck with its 2% inflation, and with this data… it allows the Fed to stick with its wait and see approach.
If the inflation data was above the 2% target… that would’ve had the opposite effect and cause the FOMC to look to leave rates unchanged or perhaps raise them. However, if that inflation data came in well below the consensus estimate, the FOMC could look to cut rates as soon as next week.
The whole idea behind inflation is when there’s low inflation (a signal of a slowing economy)… the FOMC will look to cut rates to spur economic growth.
Now, jobless claims numbers are released every week… and if we see an uptick in unemployment claims, that could strengthen the argument for a rate cut because that tells us the overall economy might be slowing down… and the FOMC would need to step in to fix that.
Tomorrow, traders will be looking for jobless claims to come in at 216K… any surprise in either direction can move the market.
Import and Export Prices
Another key data point this week will be import and export prices… this is another gauge of inflation for not only the U.S., but around abroad as well.
Basically, what import prices tell us is whether the prices of goods bought in the U.S., but produced abroad is rising or falling… and export prices tell us whether the prices of goods produced in the U.S. and sold abroad are rising or falling.
Both of these indices give us an idea of inflationary trends… and of course, traders will be keeping an eye on this with the looming FOMC meeting next week.
Another economic indicator to keep an eye on is retail sales.
This measures the total receipts at stores selling products and services to customers. If you don’t know, consumer spending accounts for more than 66% of the economy… so if you understand how the consumer sector is doing…
… you’ll have a pretty good understanding of what the Fed can do.
A weak retail sales can lead the FOMC to step in earlier than expected.
Not only will the FOMC probably be focused on these economic indicators… they may also be focused on the trade war, as that could also have an effect on economic growth.
Now, if you don’t understand these indicators… or just simply don’t have the time to watch them in the morning… that’s okay.
There’s actually something known as the Fed Watch Tool.
CME Fed Watch Tool Explained
Basically, the Fed Watch Tool calculates the probability that the Federal Open Market Committee (FOMC) will raise or cut rates based on the Federal Funds futures.
Last week, we were looking at close to a 30% chance of a Fed rate cut in the meeting next week.
However, with the updated economic indicators… that has fallen to just 24.2%.
Now, I’m going to be keeping an eye on these economic indicators and the Fed funds futures and updating you next week about potential trades around the FOMC meeting…
If you’re interested in learning more about options trades around the Fed, like these…
… and stock specific plays from not only myself, but Nathan Bear as well, who hit15 +100% winners last week, and two 10 baggers… as well as video lessons on options, and trading in general… click here to get started.
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