Delayed Interest Rate Cuts Are Now Starting to Matter
Conditions are ripe for more selling, and it won’t take much news to trigger it.
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The most notable aspect of the market action over the past five months is that it has trended steadily higher although the Fed has consistently pushed back the likelihood of interest rate cuts. In 2023, investors expected the Fed to start cutting rates as early as January, but now there is about a 60% chance of a cut in June, and there is chatter that the Fed may not cut rates three times in 2024 as has been signaled.
Market participants haven’t been concerned in this delay in rate cuts because they have been satisfied that inflation is trending lower and the economy is staying strong. It has been a Goldilocks economic environment in which inflation is not too hot and economic growth is not too cold.
In the past couple of weeks, market participants have started to question the Goldilocks economic scenario. Commodity and oil prices are rising, Manufacturing PMI was higher than expected, and there are a number of other signs that inflation is perking up. In the last few days, bond yields have spiked sharply higher.
The baseline case has been that the Fed will cut rates three times this year, but that is now being questioned, and that is causing market pressure. The fact that the indexes are extended and have not had a meaningful correction in a very long time is giving the selling pressure some added momentum.
So far the corrective action is fairly mild, although small-caps have suffered more than the major indexes. The bears have been unable to produce sustained downside since October, and the dip buyers always seem to show up quickly.
Jerome Powell is scheduled to speak around mid-day from Stanford, and the March jobs report is due out on Friday morning. These events take on special importance right now as market participants look for hints as to whether the three-cut scenario is in danger of being reduced.
The market is dealing with technical deterioration, and this time, if interest rate cuts are pushed back further, it is likely to matter. Conditions are ripe for more selling, and it won’t take much news to trigger it.
At the time of publication, James 'Rev Shark" DePorre had no position in the securities mentioned.
