By: Spencer Israel
The Federal Reserve is expected to lower interest rates when they meet later this week, following through on the dovish tone struck in recent months. While the cut is all but assured—the Fed Funds Futures are pricing in a 95% chance of a 25 bps cut—investors will be closely watching for whether the central bank hints at more rate cuts down the line.
Perhaps most notably, the market is wondering whether or not the FOMC will hint that another rate cut is in the cards when the committee next meets on December 10-11. Right now, it seems like that may not be the case, as Fed Funds Futures have it at a nearly 80% chance that the Fed will cut this week and hold steady until 2020.
A cut this week would be the third this year, a stark reversal from the Fed’s nine rate hikes in the previous three years. That change is the result of weakening economic data points—notably, slowing in the ISM Manufacturing Survey, Consumer Confidence Index, and consumer spending—that have empowered the Fed to pull some levers.
And yet, despite a dovish Fed, this year is shaping up to be a record year in terms of market performance. According to LPL Financial, if 10-year bond yields rise 1% and markets hold their current levels, it would be the first year on record that stocks, gold, oil, and treasuries all rose 10% in the same year.
Coming off a 2018 in which all four asset classes finished down, investors have been treated to a whiplash-inducing turnaround. That underlying contradiction of rising markets coupled with weakening economic data is the central conundrum of 2019.
Regardless, traders are bracing for volatility ahead of Wednesday’s decision. A rate cut would likely cause a short-term spike in defensive assets, such as gold futures, and a dip in cyclical assets like the S&P futures. As of Monday’s close, gold finds itself back around the $1,495 level that it has spent much of the last four weeks hovering around, while the S&P’s broke out to new all-time highs.
The question traders need to grapple with is what tone will the FOMC strike in their statement, and how clearly can Jerome Powell communicate the bank’s message in his post-announcement press conference? Any sustained market reaction will hinge on interpretation of those comments.
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