Market Rally Gains Momentum Amid Fed Rate Cut Expectations
Chart: SPY 1-year daily
The HCM-BuyLine® is positive as the trend is firmly back up. After a very hard and straight down drop on the first of the month, the markets have moved back to being close to all-time highs. The selloff was fast and hard, but defiantly worked off the over bought condition. The S&P 500 is now hitting a bit of resistance, but we do expect it to break out in the very near future.
Chart: VNQ 1-year daily
Bonds are looking much better and could be a nice investable asset after an almost two-year beating. With lower rates on the horizon, bond prices should move higher as rates move lower. Real Estate has broken out, which is to be expected with lower rates – this should increase earnings. We are watching for small caps to make a move higher. Lower rates will help small caps’ lower borrowing cost, which should also increase earnings.
Powell signals a shift in policy direction – his Jackson Hole speech leaned dovish but overall was very much in line with our market expectations. The Fed will embark on a rate cutting cycle at its next meeting. Powell has previously said that the first cut is consequential, implying a series of rate cuts. He said, “The time has come for policy to adjust. The direction of travel is clear…”
Powell has pivoted to focus more on the employment side of the Fed’s dual mandate, saying he does not want to see a further weakening in the labor market. With unemployment close to longer-run estimates of full employment, that provides an asymmetric response to incoming data. Our base case remains 25 bp of rate cuts at each of the next three FOMC meetings, but should data come in weaker than expected, we could see a larger 50 bp cut.
Powell is more confident that inflation will come down back to target. What Powell didn’t say is where the Fed is heading or how fast it will get there. There was no mention of r-star or where the target range will be at the end of this year or next year. The Fed remains data dependent, so unexpected data will result in a large repricing of interest rate expectations. The market is currently priced for more than 75 bp of rate cuts this year and 225 bp of rate cuts by the end of next year. The market is already priced for a soft landing and getting back to close to neutral by the end of next year.
