July 31 Fed Funds Rate Cut Wasn’t Well Received

The first rate cut in – what – 8 or 10 years just 6 weeks ago, saw the SP 500 and the high-yield credit markets sell off sharply.

The selling continued through the first half of August as the SP 500 tested 2,820 – 2,825 several times, and the long-end of the Treasury curve rallied sharply.

The 10-year Treasury yield approached the 2012 – 2016 lows between 1.35% – 1.40% the first week of September.

That’s history – what is expected Wednesday, September 18th, 2019 ? 

Expect the FOMC to reduce the fed funds rate 25 bp’s to a range of 1.75% – 2%. What is remarkable is that the probability of a 25 bp’s rate cut – per the CME fed funds futures – is now roughly 50%, even though it was over 90% a week ago.

A steepening of the yield curve would help Financials and continue to push the sector higher. As the 10-year Treasury widened last week from 1.55% yield to 1.90%, the Financial sector rallied sharply right alongside the yield increase.

While everyone will watch the SP 500 and the US stock market, the corporate high-yield ETF’s response to a rate cut such as the HYG, JNK and SHYG will be monitored. All the ETF’s are still below their June ’19 highs although not by much. (Long all three ETF’s).

Economic data has been coming in stronger-than-expected the last few weeks. Jobless claims from last week are again near 200,000, multi-decade lows.

I wonder if we get 25 and done ?

Just thinking out loud – these are not predictions.

Thanks for reading.

 

Leave a Reply