Markets steady after second FOMC rate cut this year

What Wall Street wants, it usually gets.

Last night, after some deliberation, the Fed cut the policy rate by 25bps to 1.75-2.00%. In particular, the Fed stated that its latest ‘action supports the Committee’s view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective are the most likely outcomes.

Judging from the stock market’s reaction, it appears this cut is already priced in. Going forward, however, investors are unsure if the Fed will remain this dovish. Macro data flow is one factor impacting this decision; financial stability is another. Both appear to be calm at this point.

Specifically, the stock market is performing well enough to withstand a few months of Fed ‘inaction’. The Dow, S&P 500, and the Nasdaq are all flirting near their record highs. Look at the S&P 500 ETF (SPY). The instrument just gapped up recently to probe its July peaks. Unless this breakout is neutralised, new highs are likely.

The same view is applicable to the Nasdaq 100 ETF (QQQ), where prices are just sitting below the July resistance, waiting for a catalyst to hurl the instrument over this ceiling. To countermand QQQ’s bullish assessment requires a firm break below the 188 near-term support (see below).

Overall, the Fed has done a dramatic u-turn since its Dec-’18 meeting. Rate hikes did not materialise this year. Instead, global economic turbulence and volatile stock markets forced the Fed to cut rates twice. However, the US economy is not yet in a recession while the stock market is still buoyant. Therefore, I suspect the Fed may be reluctant to cut more at this point, preferring to keep its powder dry.

(As an aside, troubling development in the repo markets that required the Fed to intervene for the third day in a row. The Fed pumped $75 billion into the money markets on Thursday morning to satisfy investor demand. We will see how this shortage of cash may spillover to the wider markets.)

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