Will the markets be disappointed? Bloomberg writes this is the second longest time between a rate hike and rate cut but is the strongest market return between a hike and a cut ever. Is the environment conducive for the proverbial buy on rumor and sell on fact outcome?
An argument can be made market volatility could rise regardless of the outcome. If the Committee lowers rates by only 25 bps, disappointment could reign. Fifty basis points, is the economy slowing too much and too fast?
As previously discussed, the volatility in market perceptions has been great. Last week, following stronger than expected inflation data, the probability of a 50-bps reduction fell to zero. Even though an obvious catalyst is absent, the probability of a 50-bps cut is now over 55%.
The Atlanta’s Fed GDPNow index currently suggests third quarter GDP will expand around 3.0% up from September’s 2.5% projected pace. Goldman also raised its third quarter GDP tracking estimate by 0.3% to 2.8%, based upon recently released data.
The decision will be announced at 2:00 PM. Also released is a new “dot plot” or where each Committee Member believes the overnight rate will be at a given date. At 2:30 FRB Chair Powell holds a press conference.
Radically changing topics, the Pager Attack in Isreal is something out of Chaos and Control, ex the Cone of Silence and Agent 99. Wow! The technology used in warfare has entirely changed the landscape.
How will Hezbollah respond? Some believe the Administration is acting in a contradictory manner. Some view the possibility of sending medium range missiles to Ukraine is an escalation in that conflict. On the other hand, the Administration is attempting to deescalate the Hamas conflict, both conflicts the result of an aggressive neighbor.
Regardless, the uncertainty is rising which could perhaps increase volatility.
Commenting on yesterday’s market activity, higher growth forecasts on top of better-than-expected retail sales and industrial production compounded unease before the outcome of today’s FOMC meeting. The disconnect between strong data and the view that a 50-bps cut is more likely than not weighed on the markets.
Equites were relatively unchanged, oil “leaped” on rising Middle East tensions, and Treasuries nominally sold off.
Last night the foreign markets were mixed. London was down 0.65%, Paris 0.44% and Frankfurt down 0.14%. China was up 0.49%, Japan up 0.49% and Hang Seng up 1.37%.
Futures are nominally higher ahead perhaps the most awaited and expected interest rate cut in history The 10-year is off 9/32 to yield 3.67%.
Oil is insignificantly lower following Israeli Prime Minister Netanyahu comment that an all-out conflict between Israeli forces and Hezbollah is becoming more likely. Netanyahu stated that diplomacy is failing, and war may be the only way to stop Hezbollah’s attacks and enable Israeli civilians to return to their northern border area.
