Weekly Market Digest: Should the Fed Cut Rates?

It was a relatively uneventful week in equity markets due to anticipation of next week’s Fed meeting and the G20 Summit the following week. Global equity markets were mixed, ending flat for the week with the U.S. notching slight gains and international developed markets notching slight losses.

The week started strong as the rally streak continued on the back of news that the U.S. and Mexico reached a deal to avoid tariffs late last Friday, but then lost steam midweek through the close. Ultimately, the focus has been on next week’ s Fed meeting as investors continue to speculate on their next move. The other major focus is on hopes for a meeting between the U.S. and China at the upcoming G20 Summit.

Looking ahead to next week, investors are looking for any further signals of a rate cut from Chairman Powell and the FOMC’s Summary of Economic Projections. Investors are increasingly betting on and rooting for a rate cut this year.

Weekly Returns

S&P 500: 2887 (+0.47%)
FTSE All-World ex-US (VEU): (-0.46%)
US 10 Year Treasury Yield: 2.09% (+0.00)
Gold: $1,341 (+.06%)
EUR/USD: 1.1207 (-1.12%)

Major Events

  • Monday – Equity markets rallied after the U.S. and Mexico reached an agreement on illegal immigration that avoided tariffs.
  • Tuesday – Personal Capital announced the launch of Personal Capital Cash™!
  • Wednesday – Shares of Beyond Meat (BYND) fell 25% Tuesday after a negative report from a JP Morgan analyst.
  • Thursday – Political tension heated up between the U.S. and Iran over allegations that Iran blew up oil tankers in the Strait of Hormuz.
  • Friday – Broadcom (AVGO) cut forecasts citing trade concerns sending technology stocks lower.
  • Friday – May Retail Sales numbers came in strong while April’s numbers were revised upward.

Our Take: Should the Fed Cut Rates?

Investors are rooting for a rate cut, but should the Fed listen to the market? For the golf fans out there, we are going to have a little fun in honor of the U.S. Open this week by discussing this topic using golf analogies.

Think of the Fed’s monetary policy decisions as something akin to course management. The most successful players on tour are the ones who consistently do this well – the ones who take risks where the payoff warrants it or lay up where the downside could mean an implosion of the scorecard. The economy is the scorecard, and the Fed must balance their rate or “shot” decisions that they think will yield the best overall result. There are also variable risks and uncertainties constantly at play that may lead them to change strategy – things like the weather (where we are in the economic cycle) or other unforeseen variables (the trade war, for example).

The fans, though, are always rooting for the high risk shot no matter the circumstances. Tour players ignore this noise and makes their decisions based off the data they have and expert discussions with their caddy. The fed must also deal with both political and market pressure, much like a golfer who must deal with pressure to make a putt or execute the right shot.

As of now the market is pricing in a 20% chance of a rate cut in June and a 95% chance of one by September. There is a decent chance the market is right, and that a rate cut is warranted. The 10- year treasury yield has dropped swiftly – around 40 basis points over the last few months. The Fed has gone from projecting 2 hikes this year to no hike, and now Chairman Powell has said the Fed stands “ready to act”.

Investors will often try to gain an edge by predicting a potential outcome causing markets to move in a way that reflect these forward-looking expectations. However, the Fed is not making bets, they are focusing on their policy mandates and concrete data to support a move. We are not quite at the place to warrant a rate cut. With inflation low, the Fed also has the benefit of some wiggle room to take a “wait and see” approach before acting. Global economic conditions have softened, and despite the possibility of a prolonged trade war, we don’t expect the Fed to preemptively cut rates simply because the market is rooting for it and pricing it in.

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