US Stock Traders Cautious Since July Rate Cut is Still Data Dependent

The major U.S. equity indexes finished higher on Wednesday despite a muted reaction to the U.S. Federal Reserve interest rate decision, monetary policy statement and “dot plot” projections.

Who can blame investors for being cautious? Traders seemed reluctant to chase prices higher at current price levels because of the fear that the Fed decisions were already fully-priced into the market. After all, Fed Chairman Jerome Powell telegraphed the shift in Fed sentiment way back on June 4, triggering a huge rally.

Furthermore, investors had a ton of data to decipher with less than two hours before the cash market close and less than three before the extended futures trading hours.

How Many Cuts and When?

When the dust finally settled, the conclusion was the Fed is going to lower rates this year although there is still some indecision over the frequency and the timing of the rate cut. If you trust the financial markets then the first rate cut since 2007 will take place on July 31. Just take a look at the U.S. Dollar, gold and Treasury yields if you need proof.

If you read through the data, you’ll note that policymakers are setting up investors for a rate cut, but when? This is not a panic situation so the Fed’s decision will still be data dependent. If labor market, manufacturing and inflation data continue to come in weak, then they’ll cut in July. If it stays steady or improves, then they won’t. That’s the risk of being “all in” at current price levels.

Be Careful Trading the Cuts Rather Than the Reasons for the Cut

What investors have to understand is that the plunge in Treasury yields and the spike in gold prices are not telling the Fed to cut rates, weakening economic data is signaling to policymakers that a rate cut may be necessary.

Stock investors could get caught on the wrong side of the market if they put too much emphasis on the rate cuts than on the reasons for the cut.

Don’t Ignore What Powell Said

After Fed Chair Powell’s post-meeting press conference, the news services seemed to focus on one point, that Powell opened the door to the possibility of a rate cut in July when he said, “Many participants now see the case for somewhat more accommodative policy has strengthened.”

However, Powell also said the Fed needs to see more data to determine whether the recent weakness in things such as jobs creation was temporary or a trend. In May, just 75,000 jobs were added.

“We want to see and we want to react to developments and trends that are sustained and genuine,” said Powell. He also said the Fed is concerned by both trade conflicts and the slowing in the global economy.

“We’ll use our tools as appropriate to sustain the expansion,” said Powell.

Furthermore, the Fed will also be watching the upcoming G-20 meeting at the end of the month, where President Trump is expected to meet China President Xi Jinping to see if there is a chance to resolve the trade war.

Stocks could trend higher over the near-term, underpinned by hopes of a trade deal and a rate cut in July, but continues could change near the end of June if the U.S. and China agree to resume trade talks, and during the first week in July if the Non-Farm Payrolls report shows an impressive improvement. Steady manufacturing and inflation data mid-July could also take a July rate cut off the table.