Fed Should Cut Now, Not Later

June 14,  5:00 pm EST

Next week we have the three central bank meetings on the agenda: the Fed, the Bank of Japan and the Bank of England.

The market is still pricing in just a 25% chance that the Fed will cut rates on Wednesday. But as we’ve discussed, I suspect that Trump wants and needs a move from the Fed at their June 19 meeting. The G20 meeting comes later this month (June 29-30) where Trump and Xi are expected to have a sit-down to discuss the trade deal. With a rate cut under his belt, Trump might feel more compelled to claim victory on the China trade talks and do the deal, giving himself enough runway into the 2020 elections to have a booming stock market and booming economy.

As we head into the weekend, let’s take a look at some key charts …

Here’s a look at stocks …



We’ve had a 6.7% bounce in stocks since Jay Powell (the Fed Chair) signaled that the Fed was prepared to act, if necessary, to sustain the economic expansion.  As we’ve discussed, ironically the better stocks do, the less likely it is that we will see a Fed rate cut.  With that said, Trump kept a lid on stocks this past week by ramping up the rhetoric on China.

What message is the interest rate market giving?  Not as comfortable a mood as we’re getting from stocks.  Here’s a look at interest rates …

Yields traded back down to the two-year lows today (below 2.06% on the 10-year government bond yield).  And German yields traded down to new record lows today (-27 bps).

And here’s a look at crude oil, which closes the week up a couple of bucks from the worst levels of the week …

But we had another run at the important $50 level on Wednesday.  As we discussed this week, the prospects of a break below $50 in oil has to be factored into the Fed’s view on inflation (i.e. it creates downward pressures) and for vulnerabilities in the economy.

So, this past week we revisited the lows of the recent declines in rates and oil.  But stocks held steady, well above the June 3 lows.

I suspect we’ll see weaker stocks into Wednesday’s Fed meeting.  If the Fed wants to surprise markets and get maximum gain from a rate cut, it would serve them well to cut rates on Wednesday, and not wait until the July meeting (where the market is pricing in a near certainty of a cut).

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