The most anticipated change ever forecasted for the federal funds rate is at hand. The question is how much? At the close of trading last week, the odds of a 50-bps reduction were zero. Yesterday a Bloomberg headline read Traders See Half Point Rate Cut Likelier Than Quarter Point.
Swaps tied to tomorrow’s Fed decision priced more than a 50% chance of a half point cut, an obvious catalyst lacking for such a change in outlook.
The markets and almost every economist including the Federal Reserve have been expecting rate cuts to commence over 20 months ago.
Blackrock wrote yesterday that the market has set itself up for disappointment expecting a more aggressive Fed than what policy makers have already telegraphed. BlackRock further stated that if the Fed lowers rates by more than 25 bps it could potentially send the signal that the economy is weaker than anticipated causing volatility to rise.
Speaking of which, yesterday mega capitalized tech shares led the NASDAQ lower as an analyst warned of some possible shortfalls in sales of AAPL’s latest phone is lower than expected.
Most have accepted the markets have become imbalanced. The concentration of funds in a handful of companies is unprecedented, perhaps creating an environment where the indices may mark time for a prolonged period while the typical stock outperforms.
Another Bloomberg headline read Smaller stocks are getting elbowed out of the indexes, limiting opportunities for diversification via benchmarks for investors and increasing concentration risk.
The Newswire further wrote that global indexes are shrinking as exploding market caps for select stocks nudge out small companies, stating that there are now only 2,422 stocks in their Bloomberg World Index, down “markedly” from 3,322 just three years ago.
The ramifications are infinite including the lack of capital for emerging companies to limiting of competition to extreme concentration of wealth in handful of names.
Last night the foreign markets were up. London was up 0.63%, Paris up 0.61% and Frankfurt up 0.64%. China was down 0.40%, Japan down 1.03% and Hang Seng up 1.37%.
Dow and NASDAQ futures are up 0.20% and 0.40%, respectively, ahead of the Fed meeting and August’s retail sales, The 10-year is up 1/32 to yield 3.62%.
