The Federal Reserve delivered a “hawkish cut,” defined as lowering the overnight rate by 0.25% but reigned in the number of cuts they expect in 2025 to only two. This was a moderate surprise as the majority of economists in a Bloomberg survey had forecasted three cuts for the next year.
Before the outcome of the meeting, traders were suggesting as many as four reductions in 2025.
Officials again raised their median estimate of where the policy rate will settle over the long run to 3% from 2.9%. Officials have said there is substantial uncertainty over where the so-called neutral rate, a rate which neither promotes nor inhibits economic activity, lies.
Treasuries sold off across the spectrum on the outcome, with the 10-year jumping the most in yield following a Fed meeting since 2013 when the Fed signaled it would start dialing down QE as per Bloomberg.
The S & P 500 had the worst Fed day since 2001, also according to Bloomberg. The Dow and NASDAQ sold off 2.5% and 3.6%, respectively, as the risk-free interest rate is a primary determinant of equity valuations.
As stated above, this is yet another surprise in the direction of monetary policy. Most have been wrong or caught flat footed over the last four years—and perhaps the past 14 years—as to the direction of monetary policy and economic activity.
Can it be suggested that yesterday’s yard sticks or guideposts may be no longer accurate? Can it be suggested that the collection and the analyzing of the data is flawed? Can we make a conspiratory statement that the data and the collection of the data has been corrupted by the political process?
Probably all of the above. The global economy, and geopolitics in general, is radically different than it was 4 or 10 years ago.
Changing topics, little attention has been focused on the growing imbalance between growth and value stocks. Bloomberg writes “this imbalance is looking increasingly unsustainable as value stocks are on the longest losing streak since 1995.”
Bloomberg further writes the ratio between growth/value index is quickly approaching the 2021 record levels. The Newswire also states the “growth stock rally is very concentrated with TSLA being its greatest contributor given Musk’s close ties to Trump but may soon face a reckoning of its earnings and economic reality.”
Stepping back for a moment, Trump has vowed to end EV subsides and mandates, yet TSLA has more than doubled since November 5 adding over $800 million in value to about $1.54 trillion. TSLA is now the sixth largest member of the S & P 500 and is about 2.6% of the benchmark’s capitalization.
Market breadth is horrific, concentration of monies is a handful of names (seven) is at bubble proportions, an environment amplified as these seven names are in one sector.
Will history view today in a similar manner to 2000 or 2008 when the obvious conclusions were ignored?
Last night the foreign markets were down. London was down 1.27%, Paris down 1.23% and Frankfurt down 0.95%. China was down 0.36%, Japan down 0.69% and Hang Seng down 0.56%.
Futures are up about 0.5%, perhaps under the guise the selloff following the Fed’s “hawkish pivot” was overdone. The 10-year is off 3/32 to yield 4.53%.
