Stocks waffled before the Fed policy statement was released yesterday, popped higher after they announced a 0.50% interest rate cut, then bounced around quite a bit afterward as investors digested the information. By the close there was some selling and the indices closed modestly lower with small caps coming in flat after giving up some big gains. Bonds were down as yields went up?
[TABLE="align: center"]
[TR]
[TD="align: center"]
[/TD]
[TD]
[/TD]
[TD="width: 311, align: center"] Daily TSP Funds Return
[TABLE="align: center"]
[TR]
[TD="align: right"][/TD]
[/TR]
[/TABLE]
[/TD]
[/TR]
[/TABLE]
The Fed spent much of his press conference talking about how well the economy and labor markets are doing, while trying to justify the 0.50% rate cut. They seem to believe inflation is fine, the unemployment rate has peaked, and GDP is solid and near their growth targets, yet they went 0.50%, telling us they are not behind the curve nor playing catch up. It was a confusing message, which may be why stocks were choppy.
I am in no way suggesting they are wrong about anything, since I don't know exactly how all of this works. But in the back of many minds we have to wonder how much of the 50 basis point move was political. Powell has never come across that way and there's no reason to think it was, but who knows what goes on behind the scenes? I just don't think his commentary justified the 2 quarter point moves.
How much of it was them trying to catch up from them being too hawkish for too long - remember we expected rate cuts all year and it took them until September to start for some reason, and now they go 0.50% on the first one? When asked if he should have moved 0.25% at their July 31 meeting, he said they may have had they seen the July jobs report, which didn't come out until August 2nd.
Of course lower rates and more liquidity, as they plan to loosen QT restrictions, is fuel for stocks, but was 0.50% because they are more worried about the economy then they let on? Again, I don't know the answer to any of this.
Ironically, longer term bond yields were up, not down, so the bond market and the F-fund moved lower on the day. Shorter term yields did fall, and I talked about the 30-day bond yield yesterday showing that the 30-day / 10-year Yield curve was still very much inverted and the steepening of those two tends to be negative for stocks.
This was yesterday's 30d/10y yield curve chart that I updated manually with yesterday's move (for some reason there's a long delay in updating yield curve charts), but it did move from -1.24 up to about -1.06, and will likely continue to rise with more rate cuts expected. You can see what the S&P 500 was doing during similar steepening periods above 0.0.
That was then. This is now, and interest rates are not being cut so much because the economy, we think, but because the Fed feels they have eased inflation enough. So this feels like a good set up for stocks, but because we just had a might rally off the August lows to all time higher yesterday afternoon, a little sell the news profit taking shouldn't be a surprise in the short-term, and if it wasn't September / October in an election year, it would seem to me a good set up for the stock market.
The Fed didn't want to appear panicked, and actually he came across quite calm in the press conference, calmer than usual, so I believed what he was saying.
Something that may not have believed it was the bond market and the dollar as Treasury Yields were not down on the rate cut, but up. At least the longer term yields. The 1-year and shorter term bond yields were down, and everything longer than 1-year was up. The 10-year was up and it closed back above the August low after the recent breakdown to new lows.
The dollar started lower, but it closed higher creating a positive outside reversal day, which generally isn't good for stocks, or prices in general.
It's hard to judge the market's reaction by the two hours of trading after a Fed rate cut, but we can probably expect a little more volatility while the indices decide which way they want to go, both short-term and longer-term. The negative reversal on the charts suggests some possible downside in the short-term.
A reminder that the seasonality calendar gets quite ugly over the next week, starting tomorrow, with a lot of that having to do with the quadruple witching expiration and the subsequent week.
Chart provided courtesy of www.sentimentrader.com
The overnight futures did open to the upside on Wednesday evening, but that doesn't mean too much.
The S&P 500 (SPY / C-fund) broke out to new highs in the afternoon, but as the market loves to do, it had investors leaning the wrong way initially after the Fed decision to cut rates 0.50%. Now we have a failed breakout, and that may lead to a short-term dip, but not necessarily anything worse, although the seasonality calendar is not favorable for the next 5 - 6 weeks.
The DWCPF (S-fund) rallied big, up about 2% at the highs before it came tumbling back down. It lost basically all of that intraday gain but managed to not close negative.
The EFA (I-fund) was down about 0.31%, but the I-fund will be, or has been, changing to another tracking index so we may not be able to use EFA as a tracking ETF. I'm looking for an ETF that will be similar to the EFA, using MSCI ACWI IMI ex USA ex China ex Hong Kong Index, which is the new approach. They are taking out China and Hong Kong and adding countries like India and Brazil. Here's more information from tsp.gov.
They said they were going to make the switch slowly this year knowing how much money needs to be moved, and it's not easy moving huge sums of money in the market without influencing the action.
In Tuesday's action the EFA suggested a loss of 0.56% for the I-fund, and the new "ex USA ex China ex Hong Kong Index" for lack of a better name, was flat on the day. By comparison the TSP gave the I-fund a loss of 0.22%, so that didn't help. I will keep an eye on this to try to get a better quote and chart that incorporates the new changes in the I-fund.
BND (F-fund) was down and yields were up on a day the Fed cut rates 0.50%? It was a buy the rumor, sell the news kind of day.
Thanks so much for reading! We'll see you back here tomorrow.
Tom Crowley
Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php
Questions, comments, or issues with today's commentary? We can discuss it in the Forum.
Daily Market Commentary Archives
For more info our other premium services, please go here... www.tsptalk.com/premiums.html
To get weekly or daily notifications when we post new commentary, sign up HERE.
Posted daily at www.tsptalk.com/comments.php
The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.
[TABLE="align: center"]
[TR]
[TD="align: center"]
[TD]
[/TD]
[TD="width: 311, align: center"] Daily TSP Funds Return
[TR]
[TD="align: right"][/TD]
[/TR]
[/TABLE]
[/TD]
[/TR]
[/TABLE]
The Fed spent much of his press conference talking about how well the economy and labor markets are doing, while trying to justify the 0.50% rate cut. They seem to believe inflation is fine, the unemployment rate has peaked, and GDP is solid and near their growth targets, yet they went 0.50%, telling us they are not behind the curve nor playing catch up. It was a confusing message, which may be why stocks were choppy.
I am in no way suggesting they are wrong about anything, since I don't know exactly how all of this works. But in the back of many minds we have to wonder how much of the 50 basis point move was political. Powell has never come across that way and there's no reason to think it was, but who knows what goes on behind the scenes? I just don't think his commentary justified the 2 quarter point moves.
How much of it was them trying to catch up from them being too hawkish for too long - remember we expected rate cuts all year and it took them until September to start for some reason, and now they go 0.50% on the first one? When asked if he should have moved 0.25% at their July 31 meeting, he said they may have had they seen the July jobs report, which didn't come out until August 2nd.
Of course lower rates and more liquidity, as they plan to loosen QT restrictions, is fuel for stocks, but was 0.50% because they are more worried about the economy then they let on? Again, I don't know the answer to any of this.
Ironically, longer term bond yields were up, not down, so the bond market and the F-fund moved lower on the day. Shorter term yields did fall, and I talked about the 30-day bond yield yesterday showing that the 30-day / 10-year Yield curve was still very much inverted and the steepening of those two tends to be negative for stocks.
This was yesterday's 30d/10y yield curve chart that I updated manually with yesterday's move (for some reason there's a long delay in updating yield curve charts), but it did move from -1.24 up to about -1.06, and will likely continue to rise with more rate cuts expected. You can see what the S&P 500 was doing during similar steepening periods above 0.0.
That was then. This is now, and interest rates are not being cut so much because the economy, we think, but because the Fed feels they have eased inflation enough. So this feels like a good set up for stocks, but because we just had a might rally off the August lows to all time higher yesterday afternoon, a little sell the news profit taking shouldn't be a surprise in the short-term, and if it wasn't September / October in an election year, it would seem to me a good set up for the stock market.
The Fed didn't want to appear panicked, and actually he came across quite calm in the press conference, calmer than usual, so I believed what he was saying.
Something that may not have believed it was the bond market and the dollar as Treasury Yields were not down on the rate cut, but up. At least the longer term yields. The 1-year and shorter term bond yields were down, and everything longer than 1-year was up. The 10-year was up and it closed back above the August low after the recent breakdown to new lows.
The dollar started lower, but it closed higher creating a positive outside reversal day, which generally isn't good for stocks, or prices in general.
It's hard to judge the market's reaction by the two hours of trading after a Fed rate cut, but we can probably expect a little more volatility while the indices decide which way they want to go, both short-term and longer-term. The negative reversal on the charts suggests some possible downside in the short-term.
A reminder that the seasonality calendar gets quite ugly over the next week, starting tomorrow, with a lot of that having to do with the quadruple witching expiration and the subsequent week.
Chart provided courtesy of www.sentimentrader.com
The overnight futures did open to the upside on Wednesday evening, but that doesn't mean too much.
The S&P 500 (SPY / C-fund) broke out to new highs in the afternoon, but as the market loves to do, it had investors leaning the wrong way initially after the Fed decision to cut rates 0.50%. Now we have a failed breakout, and that may lead to a short-term dip, but not necessarily anything worse, although the seasonality calendar is not favorable for the next 5 - 6 weeks.
The DWCPF (S-fund) rallied big, up about 2% at the highs before it came tumbling back down. It lost basically all of that intraday gain but managed to not close negative.
The EFA (I-fund) was down about 0.31%, but the I-fund will be, or has been, changing to another tracking index so we may not be able to use EFA as a tracking ETF. I'm looking for an ETF that will be similar to the EFA, using MSCI ACWI IMI ex USA ex China ex Hong Kong Index, which is the new approach. They are taking out China and Hong Kong and adding countries like India and Brazil. Here's more information from tsp.gov.
They said they were going to make the switch slowly this year knowing how much money needs to be moved, and it's not easy moving huge sums of money in the market without influencing the action.
In Tuesday's action the EFA suggested a loss of 0.56% for the I-fund, and the new "ex USA ex China ex Hong Kong Index" for lack of a better name, was flat on the day. By comparison the TSP gave the I-fund a loss of 0.22%, so that didn't help. I will keep an eye on this to try to get a better quote and chart that incorporates the new changes in the I-fund.
BND (F-fund) was down and yields were up on a day the Fed cut rates 0.50%? It was a buy the rumor, sell the news kind of day.
Thanks so much for reading! We'll see you back here tomorrow.
Tom Crowley
Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php
Questions, comments, or issues with today's commentary? We can discuss it in the Forum.
Daily Market Commentary Archives
For more info our other premium services, please go here... www.tsptalk.com/premiums.html
To get weekly or daily notifications when we post new commentary, sign up HERE.
Posted daily at www.tsptalk.com/comments.php
The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.
