Fed hits markets with aggressive rate cut amid strong economy and pre-election pressure

• JJ is BACK! 

• Fed slashes rates by 50 bps.

• Marets that were unsure yesterday are celebrating today.

• Oil up, Gold up, Bonds up and Stocks up.

• Try the Chicken Thighs w/Pancetta and Balsamic Vinegar.

Well, there you have it…..JJ gets up to the podium, spends 10 mins telling us how strong the economy is and how inflation is coming down, how the job market remains solid and how he does not expect us to go into a recession and why we have nothing to worry about and then he hits us with a 50 bps reduction in rates to stimulate the already strong economy…..  I mean he said “The economy is strong” – those are his words, it is so strong that it needs a ‘crisis level’ rate cut just 6 weeks ahead of the most contentious, chaotic presidential election we have ever seen.

I think he caved, I think they put the pressure on him, I mean 2 weeks ago it was all about 3 – 25 bps rate cuts this year, it was all about slow and steady, it was all about not ‘rocking the boat’ and then suddenly last week it all changed.

They (the FED) went into blackout mode on the 9th  and then leaked the idea to test the market……Nicky T released the first article in the WSJ on the 12th – questioning the logic of a small 25 bps cut vs. a bigger 50 bps cut and how 50 would be seen as taking control and not one of panic. Then on Monday the 16th,  we had the big banks all come out and say that 25 or 50 is irrelevant….that it will be about what the future data says…and then on Tuesday the 17th – Greg Ip again of the WSJ wrote a piece basically saying that it needed to be 50 bps – and so there you have it.  The FED getting pressure from the current administration, getting pressure from congress (Lizzy Warren leading the pack)  and from the street over the past month – caved….and leaked the move to the media to prepare the markets…..And so anyone that was really surprised by this must have been sleeping under a rock…And while I had been pushing for a 25 bps cut – I acknowledged that 50 was the plan in yesterday morning’s note.

“In any event – while I still think he should only cut by 25 bps – my 42 years of experience tells me to listen to what the market is demanding and what the FED has leaked to the WSJ…...and that is 50 bps... so again, anything less will be met with big disappointment.”

So now its done and we can expect all kinds of ongoing analysis and arguments both for and against the move – but it is what it is….Time to move on….now the focus will turn to November….They will try to discern what the November & December cuts are going to be based on what JJ said yesterday…..The FED dot plot has 50 bps more penciled in for this year……so 25 and 25 would make sense….but I guess we have to see what the data tells us in the weeks just ahead of the election… In the end – JJ made it very clear that he has shifted his focus from inflation to supporting the labor market and thus the broader economy. 

And just to be clear – the street is betting on 70 more bps worth of cuts by year end…. which means if we get that – the FED will have cut by 120 bps in an economy that is already strong…. Makes perfect sense, no? 120 bps would get the fed funds rate down to 4%.... Capisce?  Good for mortgages (they have already come in and will come in a bit more on the idea of ongoing cuts) and maybe good for auto loans (maybe) – and that’s great – how many houses and autos are you buying next week?  And if you think homeowners with 2.75% or 3% mortgages are going to run out and sell their current home to buy a bigger, more expensive one at a 6% rate – you need your head examined….The only ones that would be doing that are people that are being relocated and have no choice. Homeowners with 3% mortgages are not ‘moving on up to the eastside’ to take on a 6% mortgage unless they are forced to. Now by this time next year – analysts are suggesting we could see 5% – 5.25% mortgages….and that would be significant enough for those with 6% and 7% mortgages to refinance.

Now stocks wavered all day unsure of what to do and then after the announcement they shot higher – the Dow and S&P’s making new intraday highs as the first headlines hit….and then the more he spoke the weaker they got amid concerns of a potential economic downturn …..The Dow swinging 340 pts from the high to the closing print.  At the end of the day though, it was NOT a disaster. The Dow lost 103 pts or 0.25%, the S&P down 17 pts or 0.3%, the Nasdaq gave up 55 pts or 0.3% while the Russell added 1 pt, the Transports added 58 pts or 0.4% and the Equal Weighted S&P gave up 13 pts or 0.2%.

As the sun moved across the Pacific – we waited to see how the world was going to react to the ‘big cut’….as Asian markets prepared to open….and guess what?  Investors around the world are celebrating the move…. Asian markets all ended the day higher…. Japan being the biggest winner up 770 pts or 2.2%!  Hong Kong was not far behind up 353 pts or 2%, Taiwan +363 pts or 1.7%, China + 25 pts or 0.8%, Australia +50 or 0.6% while South Korea added 6 pts or 0.2%. Now Friday is a big day in Tokyo – BoJ Governor Ueda has to make sure investors understand that rate HIKES are coming in the future even as he stands still on policy this week.

And in Europe markets across the board loved what they heard…. screaming ‘JJ” s Back!’  as they await today’s BoE decision…. Now they are expected to leave rates unchanged at 5% - feeling no pressure to mimic the FED’s move especially since services inflation remains stubbornly high. In Norway – the Norwegian Central Bank kept rates unchanged at 4.5% leaving any rate cuts off the table until next year. Markets across the board are up between 1% - 1.75%.

And here at home – Investors are loving the idea of that BIG cut…..it is definitely going to be a Risk On morning….US futures are rocketing higher – Dow + 450 pts or 1.1%, the S&P’s up 82 or 1.5%, the Nasdaq +375 pts or 1.9% while the Russell is up 60 pts or 2.7% all on the idea that the FED has it under control, that the soft landing they have been hoping for has arrived giving fuel to risk assets (stocks).  A Bloomberg survey – shows that 75% of respondents expect the US to ‘avoid a technical recession’ thru 2025!  A technical recession is a short-term decline in economic activity defined as 2 consecutive qtrs. of negative growth in real GDP which I am sure will be re-defined if it happens.  

Bonds sold off – the TLT down 1.25% while the TLH lost 0.9% and this sent yields a bit higher…. the 2 yr. yielding 3.58% while the 10 yr. is yielding 3.69%.   

Oil is once again trying to pierce the August lows of $72 ish…as the Risk On tone takes hold…. This on the idea that the US is not headed towards a recession, therefore future demand should be strong.  In addition – Israel has turned up the heat again – saying that the war has entered a ‘new phase’ against both Hamas and Hezbollah – raising fears about a wider conflict…and that conflict could impact oil – only adding to higher prices.  We have to get up and thru $72 first and then run right into the short-term trendline at $74 that is in decline.  So, while we may get a pop, I am not sure it will be strong enough to push up and thru all 3 trendlines.  

Gold sold off yesterday – trading as low as $2572 before settling in at $2598.  This morning it is up $20 at $2618 as the excitement continues.  Lower interest rates, will weaken the dollar and that is supportive of both gold and oil.

The S&P closed at 5618 – down 16 pts….and with futures on fire this morning…. we can expect the S&P to try and kiss another new century - 5700. I would expect to see all the 11 sectors do better today….as new money continues to find opportunity outside of tech…. now that we have been assured of a soft landing…. I would say be careful how excited you get.  You are invested so you are participating…. don’t let your emotions get the best of you.  Remember -It’s about having a plan and remaining focused and balanced. Building a strong, well diversified portfolio takes time and commitment, but in the end pays off big.

Chicken thighs with pancetta and balsamic vinegar

For this you need:  Olive Oil, Diced Pancetta (Or Bacon),  8 Medium Sized Skinless Chicken Thighs,  Onion, Diced, Garlic Cloves, Peeled & Minced, Dry Red Wine, 1 Can Diced Tomatoes, Tomato Paste, Water, Chopped Rosemary, Chopped Thyme, s&p,  Red Hot Pepper Flakes (Optional), Balsamic Vinegar, Chopped Fresh Parsley.

In a large heavy skillet, heat the oil over medium heat and cook the pancetta until cooked through and lightly browned, about 5 minutes.  Remove the pancetta to a plate, set aside, and brown the thighs well on all sides, about 10 minutes. Remove the chicken to the plate and cook the onions until translucent and soft, stirring often, about 5 minutes.

Add the garlic and sauté for 3 mins or so, Add the wine, (about ½ cup) increase heat to medium high heat, and cook just until the wine is reduced by half.

Now add the tomatoes, tomato paste, water, rosemary, thyme, salt, pepper, and red pepper flakes if you are using.

Bring to a boil, then reduce to a simmer and return the chicken and pancetta to the pot. Cover the pan, and simmer for 20 mins, or until the sauce has thickened, adding additional water as needed if the sauce thickens too much. Taste the sauce and adjust s&p as needed. Now stir in about 1 tblsp of balsamic vinegar – mix well and place the chicken on a platter.

Top with the sauce, then sprinkle with the chopped fresh parsley.