Here is a look at the situation post Fed decision.
Post Fed Decision
October 31 (King World News) – Art Cashin: “Nick Colas and Jessica Rabe over at Datatrek provided another of their lucid summaries of the Fed’s message. Here’s what they wrote:
The Federal Reserve’s mid cycle correction is at an end. That was the most important takeaway from today’s FOMC announcement and Chair press conference. Fed Funds Futures markets are on board with that message, more or less:
- Odds of a December rate cut are just 20% as of today’s stock market close.
- The probability that Fed Funds will remain at the new target range of 1.50% – 1.75% through
Q1 2020 are better than 50%. - You have to go out to July 2020 to see the odds tip convincingly to further Fed easing, and
even then it’s only 60-40 and the modal (most likely) outcome is for just one further cut.
Chair Powell’s comments during his press conference today repeatedly touched on 3 reasons for this shift to stable Fed Funds rates: - Global trade tensions are easing due to progress on US-China talks and the reduced chance of a hard Brexit.
- While business confidence has been waning, this has not affected the US labor market. That has helped keep consumer spending strong which, when combined with lower interest rates, supports the domestic economy.
- Powell sees the current rate as accommodative (lower than inflation) which should help keep the US economy running hot enough to anchor inflation expectations and keep labor markets healthy.
As far as why equities rallied after the press conference, we attribute that move to one question that essentially asked, “When will the Fed take back this year’s rate reductions, as they did after the late 1990’s ‘insurance cuts’?” Powell’s answer was that the Fed is not considering that because core inflation remains so muted and inflation expectations are still trending lower.
We think what the market thought it heard was – “This brings rates in line with the current economy as trade talks drag on. Given the weakened state of inflation by the gauges we use if there were to be another rate change, it would more likely be a cut rather than a hike.
While the stock market responded favorably to the cut and the comments, there were other comments that I found disturbing.
One of the questions during the press conference had to do with the repo rate spike that had occurred several weeks ago.
Powell said the Fed and others continue to do “forensic” reviews to determine what caused the spike. If, after weeks, you don’t know what caused the spike, then, de facto, it could happen again.
To prevent another spike, the Fed is expanding reserves by expanding its balance sheet. (Hey, didn’t we used to call that – Quantitative Easing.) Powell said they would continue to expand the balance sheet through the second quarter of 2020. There’s more here than meets the eye.
Anyway, stocks closed near the highs, which should have made Powell happy.
Overnight And Overseas – Equity markets in Asia closed mixed after the latest Fed move. Japan had a modest rally and Hong Kong saw a more robust advance. On the other hand, Shanghai saw a mild selloff while India rose fractionally.
Stocks in Europe are lower after China expressed doubts about a quick resolution of a U.S./China trade pact. Paris and Frankfurt are moderately lower, while London is down a bit more steeply as election concerns add to nervousness.
Among other assets, Bitcoin is trying to consolidate around the $9000 level. Gold has moved back above $1500. Crude remains stuck in a rut with WTI trading at $55. The euro is flat against the dollar, while yields are down a tick, or two.
Consensus – Shortly after 5:00 this morning, a Bloomberg headline hit, suggesting Chinese negotiators had doubts about reaching a comprehensive trade deal. The story hints that the Chinese may see Mr. Trump may be too mercurial to actually abide by any agreement. The headline flipped the futures to the downside.
Stick with the drill – stay wary, alert and very, very nimble.
***KWN has now released Michael Oliver’s remarkable KWN audio interview and you can listen to it by CLICKING HERE OR ON THE IMAGE BELOW.
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