Traders bet big on a larger rate cut as the Fed faces mounting pressure

• It’s here….The September FOMC meeting on Wednesday.

• The market is now leaning towards a 50 bps cut.

• BoE announces their intention on Thursday

• Oil & Bonds rally, Gold enters a new century and the dollar weakens.

• Try the Chicken Piccata Meatballs.

Algo’s and traders keep pushing stocks higher…. betting on the idea that the FED is about to announce a larger than expected rate cut on Wednesday.  Billionaire hedge fund manager John Paulson and the Wharton School Professor Jeremy Siegal are just two of the people calling for the FED to be more aggressive, to front load this cycle by cutting rates by 50 bps……. Recall – the expectation is for a 25-bps cut……but traders and algo’s are not happy with that….and are demanding a 50-bps rate cut (as per the latest WSJ headline article – more below) ….and so, stocks rallied hard again.

The Dow gained 297 pts or 0.7%, the S&P up 30 or 0.5%, the Nasdaq up 114 pts or 0.65%, the Russell added 53 pts or 2.5%, the Transports gained 92 pts or 0.6% and the Equal Weighted S&P added 66 pts or 0.7%.

Remember the WSJ article I told you to watch for 2 weeks ago?  The one where Nicky T lays out a plan for a 50-bps rate cut?   Well – here it is…. It came out in Thursday’s edition.

“Federal Reserve Chair Jerome Powell Faces a Difficult Decision as the Central Bank Prepares to Cut Interest Rates Next Week: Start Small or Begin Big?”

Here’s the skinny – the article (released during the quiet period) makes it clear that the FED may be considering a 50 bps rate cut and this article is the way the FED ‘tests’ the market’s reaction…..And it is exactly what I told you was likely to happen if the FED was really considering a bigger cut……it was either the WSJ or a Goldman Sachs ‘breaking research’ piece…..  Now, if we do not get that Goldman piece, then my gut says we’re going to get a 25-bps cut and if we do get that piece then it’s a ‘lock; 50 bps – here we come.

In any event – it will be about what the FED says after they announce the cut.  Will they define the new neutral rate?  Because right now, it’s all over the place…Some calling for a 3% neutral rate while others suggest it’s more like 4.5%.  Will they tell us that the job market is not as bad as Paulson & Siegal suggest? Will they be able to convince the markets that they are not behind the 8 ball?  Look, nobody expects it to be one and done, so we still have November, December and next year!

Remember – in my opinion, if JJ cuts aggressively (50 bps) it screams ‘Houston, we’ve got a problem’ which again would be cause for a sell off….…so he is walking a fine line…. he needs to be clear that the FED is not panicking.

But it brings up another issue…. Does the FED need to cut rates by 50 bps – just weeks ahead of a very chaotic and divisive Presidential election?  Can anyone really say that if they cut by 50 bps that it is nothing more than pandering to one party over the other?  Remember – the FED is not supposed to (its just understood) make a move in rates (in either direction) 6 months ahead of a Presidential election, unless it is really necessary – never mind 50 days (7 weeks) ahead of it…. which is where we are….  So, think about that for just one minute. A 50-bps cut just weeks ahead of the election will be seen as nothing other than support for Kamala – Period, the end.

Ok – in any event – all the sectors rallied nicely….and guess which one was the standout?  Utilities!  The most boring, ‘un-sexy’ sector in the group gained 1.4% and is now up 24% ytd… And what that tells you is that investors are expecting rates to come down and when they do – money moves into Utilities – because of the typically high dividends they pay in addition to the growth prospects that many of them are now displaying….….Think DUK +20% ytd, ETR +25% ytd, LNT +16% ytd, PEG +37% ytd…and they all have a dividend yield greater than 3.5%....Not bad, huh?

Utilities are second only to TECH, which is +26% ytd…Communications + 21%, Financials +18% and Consumer Staples + 17.7% round out the top 5 sectors ytd….Then we have Healthcare +14.2%, Industrials + 14.2%, Real Estate – which was this year’s underperformer – has rallied nicely on the idea of lower rates and is now up 12.4% ytd.  Consumer Discretionary + 9%, Basic Materials + 7.9% and Energy is now the laggard – up 2% ytd. 

Down the food chain – we saw Homebuilders surge – rising 3.3% on the idea of lower rates, Retail gained 2.9% (I’m thinking holiday shopping season – that is about to kick off) –Disruptive Tech + 1.7%, the Value Trade – SPYV + 0.7%, Semi’s + 1.3%, Metals and Miners +2.9%, Cybersecurity +0.8% & Aerospace & Defense +0.5% and the list goes on….

Clearly those ‘strategic’ contra trades did NOT have a good week at all (which is why I told you they are ‘strategic and short term in nature) and the VIX (Fear Index) at 16.56 has pierced short-term trendline support at 17.68 and is now about to test both the intermediate and long term support trendlines at 15.29/14.67.  Let me remind you that a falling VIX is supportive of higher prices – that is until something changes that narrative – and it usually hits us upside the head before we realize it….  Last week – we saw the SH lose 3.9%, the PSQ -5.7%, the DOG gave up 2.5% while the VIXY lost 12.9%!  Capisce?

Bonds rallied along with stocks and that sent the TLT and the TLH both up 0.3% and it sent the AGG +0.2% on Friday.  Leaving bond yields lower - the 2 yr. bond is now yielding 3.58% down from 3.65% while the 10 yr. is yielding 3.65% down from 3.68%.   Today is the 10th day of being un-inverted (otherwise known as a positive yield curve) - and still NO recession.

Oil which has had a tough time of it since early July – was off 22% over the last 3 months trading as low as $65.20. Last week – it started to find some bargain hunters…taking it up 5% and this morning it is up another 0.5% at $69.  Last week I said I thought it was going to trade higher and test the August lows of $71 ish…to see if there was real resistance and I still believe that…..considering the slowing China story, the slowing US story and the abundant supply of oil from the Non-OPEC producers is alive and well.  In any event real trendline resistance is up at $74.70.

On Friday gold kissed and pierced a new century mark - $2600/oz…to close at $2610.  An amazing performance for gold +24% ytd.  This also screams a ‘safety trade’….  Investors flock to gold when they are a bit anxious about the economy, when the dollar weakens and when they expect inflation to surge…… Interesting, No?  The economy is weakening, the dollar is weakening, and many analysts expect inflation to re-emerge.  This morning – Gold is up another $4 at $2614. A trendline drawn from the December high suggests a target of $2640 before we hit resistance.

Friday the Dollar lost another 0.25% and this morning the dollar is down 0.4%....to 100.67 – about to test the August low of 100.50.  This is a KEY level…. We have tested it 5 times since January 2023…. A failure to hold here could see the dollar trade down to 95…. a level last seen in the fall of 2021 into the spring of 2022. 

This morning – US futures are higher as the opening bell gets ready to ring….  Dow futures are + 100, the S&P’s up 7, the Nasdaq flat, while the Russell is up 18.  All this as investors, traders and algo’s bet on the size of Wednesday’s rate cut…. which means nothing for the price of steak, eggs, chicken, butter and milk…That’s another story.  What would it take for prices for those items to fall?  A recession…. So, sit tight.

European markets are mixed to slightly higher…In addition to the FED, we will also hear from the BoE…the market is split about what they will do….last month they cut by 25 bps….this month it’s a toss-up on whether they will cut again or leave rates alone.

The S&P closed at 5626 up 30 pts… This week brings us Retail Sales, Industrial Production and Capacity Utilization along with Housing Starts, Building Permits and Existing Home Sales.  But the BIG event is Wednesday’s FOMC rate decision….so sit tight…. Remember – it’s not the cut that everyone wants to hear, it’s what it and he says about the November meeting and beyond…. I expect the same old commentary…. it’s all about the data…. right now, the data calls for slow and steady.

In the final analysis - long term investors need to remain focused and balanced. Building a strong, well diversified portfolio takes time and commitment.

Chiken piccata meatballs

These are delish…and so easy to make.

For this you need:  Shallots, half & half, s&p, parsley, capers, grated Parmegiana, breadcrumbs, garlic powder, onion powder, eggs, butter, white wine, fresh lemon juice and chicken broth.

Start by dicing the shallots and adding to a large bowl, add in one egg, cheese, chopped parsley, breadcrumbs, half & half, chopped capers and season with s&p, garlic powder and onion powder.  Mix.

Now add in 1 lb. of ground chicken – season with a bit more of s&p.  Now mix well. 

Heat up a large skillet with olive oil.  Form the meatballs and roll them in more breadcrumbs and then fry them on all sides.  Remove and repeat until you have fried all the meatballs.    

When done – using the same pan – add in a bit more olive oil and more diced shallots.  Sauté until they are nice and translucent.  Now add in a splash of white wine and chicken broth to deglaze the pan.  Let it come to a boil and reduce by 1/3rd. 

Now add in 1/2 stick of butter (cut into pieces so it melts faster), more capers, parsley and juice from half of a lemon. Stir.  Add back the meatballs and let simmer for 5 mins.  If you need to – add a bit more chicken broth to keep them in a ‘sauce’. 

You can eat these as is with a big salad or you can boil up some spaghetti and serve them over the spaghetti with the sauce.  Either way- you won’t lose.