Investors Are Anticipating Both a Half-Point Cut and a Soft Economic Landing
Extreme bullishness in front of the Fed decision sets up as a 'sell the news' event.
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Market participants have been anticipating that the Fed will cut interest rates for many months, but it is a near certainty this week. The Fed announcement will come on Wednesday afternoon, followed by a press conference with Chair Jerome Powell.
The market has been increasingly optimistic about a half-point cut. On Monday morning, Fed Fund Futures indicated about a 60% chance of a 0.5% hike, up from 25% a month ago.
Many were concerned that a half-point cut may send a signal that the Fed is behind the curve and is now rushing to avoid a recession. However, slightly hotter-than-expected CPI and PPI reports give the Fed cover for more aggressive cutting.
What has been moving the market back up over the past week is a return of the Goldilocks economic scenario. There is greater confidence that inflation is under control and the economy is still quite strong. That has caused a furious rally and will be an interesting technical setup for Wednesday afternoon.
Market participants want both a half-point cut and a soft landing, but there is now growing confidence that this is possible. However, extreme bullishness in front of the news will be a "sell the news" setup, especially with negative seasonality still in play.
This easing cycle is fairly rare in that it is coming at a time when there isn’t any major economic slowing or a credit market problem. The last time the Fed cut when the market was strong was in 1995, and conditions are probably even better now. Typically, when the Fed starts cutting, the economy is already in substantial distress, but that is not the case this time.
It is likely that we will see some folks wait on the sidelines in front of the Fed decision. Chasing strength into the news when there has already been a substantial runup makes for tough entry points.
There should be plenty of random positioning in the next couple of days, and I’ll be primarily focused on managing current positions rather than adding new exposure.
At the time of publication, Rev Shark had no posiitons in any securities mentioned.
