Derek Holt’s Post

DAILY DROP Go big or go home? With the markets now evenly split on whether it's 25bp or 50bp, why wouldn't the Fed fire the bazooka & cut 50 since it feels like the market won't wet the bed & will take the larger cut in its stride? The phoney war is almost over - one swallow does not a summer make,, but it's been 50 all the way for me in any case. But one cut is not the panacea for rising recession risk & Fed hesitancy thus far may well have already prompted a harder landing than necessary - history would tend to bear this out - let's hope not. A boredom bounce in US stocks faded into the close last night, whilst Asian indices are split both ways indicating equally a lack of conviction &/or a degree of apathy. After the rate decision the markets will become unnecessarily consumed with the next micro data drop - that's trading not investing isn't it? The Fed is not the only CB meeting this week with BoE watchers expecting no moves on rates to be announced on Thursday - the market is pricing in just one more 25bp cut in FY24. An "out of range" inflation number today might change that but that seems highly unlikely. Meanwhile after 3 sessions of higher prices, oil slipped back to $73 bbl amidst fears of rising stock piles, a weak Chinese demand outlook & a slowing US/global consumer. This however despite rising geo-political tensions as Lebanon/Hizbollah looks to reprisals following 9 deaths & many more injured alleged to have been caused by exploding pagers of all things. Whilst I understand the argument for a weakening mid/longer term outlook for oil, the markets don't control extraneous terrorist events nor the actions of OPEC in its determination to underpin prices - so oil still looks cheap to me. Add in further uncertainties from a potential escalation in the Russia/Ukraine conflict & (this is not a weather forecast but it's already snowing in the lower Alpes in September!!) the uncertainty added by the prospect of a bleak winter (SKS/RR may come to further rue the action on winter fuel payments!?). It's NEVER just about the numbers Dear Reader. Companies wise - Blackrock & Microsoft have announced a $30bn (and leverage-able to $100bn!) AI fund to invest in the data warehouses & other infrastructure required to support the significant requirements for global AI expansion - so it's a RE play (in part) parcelled up as an AI play - I like the spin & the trade makes huge sense - expect copycat funds in your inbox some time real soon Dear Reader. In the UK, what was once The Hut Group, now just common or garden THG, reported a 3.6% decline in revenues for the first 6 months of its latest FY, prompting a 12.4% slide in its stock price to just 56p. How the mighty have fallen? IPO'd in 09/20 at 500p (£4.5bn valuation), market capital rose to north of £6bn but now languishes at just £749mm. An ignominious fall from grace - I don't have room here to talk to the craziness of the vacation at its peak) - for another day. Happy Fed watching!

The Fed’s big bang rate cut After biding its time, the Fed kicked off its monetary easing cycle with a strong start out of the rate cut gates. While investors may harbour concerns the Fed is getting ahead of itself, we highlight why we’re encouraged by the Fed’s proactive move.

Markets 30 Sept 24 - looking for the next big thing Cuts are bad for the Dollar and bonds Dollar has been rangebound with downside bias reacting to a host of factors. Yields meanwhile have turned higher despite weaker data. The combination with the Dollar’s move shows that the Fed will continue cutting rates. The continued expectation of rate cuts is pressuring the Dollar lower while yields are pressured higher as the Fed is cutting rates into a rather solid economic performance. The yield curve itself has turned positive from 2 years onwards signalling that the recessionary expectations have faded.   Curve shifting to optimism  We have always heard that an inverted yield curve is a harbinger of a recession. What then of the current episode when the curve was inverted for a considerable amount of time. Perhaps this time it is not an indication of recessionary worries, rather that the Fed had raised rates too much and that they will have to act aggressively to stave off any potential for a recession. The curve shape then was a warning rather than a stone clad indication of an economic retreat ahead.    Fed Speak confirming cuts While the data was weak echoing weakness on the other side of the Atlantic, the weaker data reinforced rate cut expectations helping to push yields higher. Fed Speakers were also supportive, Minneapolis Fed President Kashkari backing another 0.5% cut while Atlanta’s Fed President Bostic saying that the current level is far from neutral. This was followed by Chicago’s Goolsbee stating that interest rates need to be lowered significantly to protect the labor market.      Trying to find something to trade on Overall, it has been a mixed week internationally. Both the Dollar and yields taking various cues while also moving on technicals. Markets move like this usually during periods of uncertainty over what will dominate trading. Even the significant rise in geopolitical tensions between Israel and Lebanon has not cause a significant move. Usually, tensions will result in the Dollar moving up and yields moving lower. Neither did not occur and shows the relative impotency of geopolitics to drive market direction.   Markets rangebound ahead of NFP Given movements last week, we can expect markets to continue trading neither here nor there unless economic data releases change materially. We can see a rise in volatility tomorrow on ISM manufacturing and on Thursday on ISM services. Markets will want to gauge how the economy is going and what it means to the Fed. Expect a large jump in volatility on Friday when we will get the payroll figures. Fed Speakers have pointed towards labor markets in justifying their cuts. A miss here will send the Dollar lower and yields higher while equities gain given that rate cut expectations will remain firm. A bigger miss along with a big rise in unemployment however will result in all three falling as it would indicate that the Fed is behind the curve and will have to act to stave off a recession.

Fed's July 2024 Meeting Done - Steady Ahead The July 2024 FOMC meeting has come and gone. As we expected, the Fed held rates at 5.25%-5.50%. The decision was unanimous. The outlook was cautiously dovish. During the press conference, Chairman Powell stressed that inflation is falling and that the labor market is still strong. This means that any future cuts are going to be done into a solid economy. While indicating that September 17-18 FOMC meeting could see a cut, he also repeated the words "totality of data", which we see as providing the central bank wiggle room to put off a rate cut to October. The bottom line is that an interest rate is coming in the not-too-distant future. We would give a rate cut for September at around 40%, but still lean to October. There is a political dimension to all of this - the Republicans are arguing that a rate cut would help the Democrats, and the Democrats are arguing that a rate cut is needed to prevent the economy into slipping into a recession, which would impact the labor pool. In this, the Fed is damned if it does or doesn't. Depending on the political heat, the Fed could wait until the November FOMC to act. One issue that is going to be discussed more in markets is what is the Fed's future neutral rate policy? To avert a too rapid a cooling in the economy (which is very gradual), a rate cut is needed. How this policy is handled will impact the inverted interest rate curve, something seen as an indicator of recession. With a Fed rate cut drawing closer attention is going to be given to the 2-year and 10-year yield curves, with investors watching for a reversion to a more normal relationship. One last factor to mention is the geopolitical state of world affairs, with a particular eye to the Middle East. While the Gaza-Israel conflict has been relatively contained in markets, the threat of a wider war between Israel and Iran and its proxies (Hezbollah in Lebanon and the Houthis in Yemen) is increasingly real. This was brought home over the last month with a Houthi drone attack on Tel Aviv, Hizballah rocket attacks on the Golan Heights, and Israeli counterstrikes in recent days that have killed a Hezbollah commander in Beirut and a Hamas leader at his opulent home in Tehran. A region-wide conflict would clearly impact financial markets, though it is difficult to determine the impact on the US economy at this stage. It remains an X factor, but the uncertainty the situation creates could see more buying of US Treasuries a flight to safety. Scott B. MacDonald, Ph.D. Chief Economist Smith's Research & Gradings

Yesterday, the US Fed announced a rate cut for the first time since 2019. It did not reduce it as usual by 25, but by 50Bpt It also announced a plan to complete the reduction until the end of 2024 with three reductions totaling 75 bpt, and expectations in 2025 that the interest will reach 3% or less. In my opinion, the US Fed announced with this step that it learned the lesson from the experiences of its predecessors and from previous recession stories in the modern era, as they were waiting until inflation reached the target rate and then began reducing interest. However, since the use of the interest rate tool, despite its strength, its results do not appear on the economy and the labor market until a year or more later, as the recession hits the markets and you do not benefit from it until the labor market and capital markets collapse. It did not wait until inflation reached the target, and it also initiated a large reduction as a start in order to preempt the recession and prevent it from happening, and I strongly believe that it will succeed in doing so. Now that the era has ended Raising the interest rate or QT and we started QE programs, the markets know how to react to it, as the stock markets rise and the risk appetite of investors increases and money moves out of high-value stocks to the stocks of distressed companies, so the Russel 2000 index of small and medium-sized companies rises more than the Dow30 & S&P500. For ex, in the electric car sector, money will move from Tesla shares to the stocks of electric car companies that stumbled due to raising the interest rate, such as Polestar, Lucid and Nio. sectors that need huge financing will recover due to the decrease in the interest rate, such as the green energy and mining sector, so we will see the stocks of solar energy companies and gold mining, etc. And in the bond market, money moves out of safe bonds and goes to high risk bonds because they give higher returns. And also from bonds with short to long duration and from high coupon bonds to zero coupon bonds because they give higher profitability in times of interest cut In the forex , it goes out from the dollar and the euro to second-tier currencies such as the Chinese and Indian currencies etc I believe that the markets will not collapse and will not repeat what happened in the past, as most analysts I care to follow, as they say that the markets fall when the interest rate is reduced due to expectations of recession. As long as there is no recession, the markets will not fall as they expect, but there will be a change in investment portfolios with a tendency to rise, and whoever bets on the decline is the one who will sell with the first correction downward and then buy his shares at a higher price after the markets rise, and so it goes in this episode In my opinion and experience the most important thing is to diagnose the future state of the market to determine its direction and then deal with it on this basis

After a strong start to the year, market volatility seems to have returned. While we would expect market volatility to continue near-term, we are also watching for key inflection points that may indicate the early innings of a more sustainable rally ahead. We highlight three potential conditions that we believe would support better market returns longer term: 1) inflation moving lower, 2) the Federal Reserve pausing its rate-hiking cycle, and 3) earnings revisions bottoming.

After a strong start to the year, market volatility seems to have returned. While we would expect market volatility to continue near-term, we are also watching for key inflection points that may indicate the early innings of a more sustainable rally ahead. We highlight three potential conditions that we believe would support better market returns longer term: 1) inflation moving lower, 2) the Federal Reserve pausing its rate-hiking cycle, and 3) earnings revisions bottoming.

After a strong start to the year, market volatility seems to have returned. While we would expect market volatility to continue near-term, we are also watching for key inflection points that may indicate the early innings of a more sustainable rally ahead. We highlight three potential conditions that we believe would support better market returns longer term: 1) inflation moving lower, 2) the Federal Reserve pausing its rate-hiking cycle, and 3) earnings revisions bottoming.

After a strong start to the year, market volatility seems to have returned. While we would expect market volatility to continue near-term, we are also watching for key inflection points that may indicate the early innings of a more sustainable rally ahead. We highlight three potential conditions that we believe would support better market returns longer term: 1) inflation moving lower, 2) the Federal Reserve pausing its rate-hiking cycle, and 3) earnings revisions bottoming.

After a strong start to the year, market volatility seems to have returned. While we would expect market volatility to continue near-term, we are also watching for key inflection points that may indicate the early innings of a more sustainable rally ahead. We highlight three potential conditions that we believe would support better market returns longer term: 1) inflation moving lower, 2) the Federal Reserve pausing its rate-hiking cycle, and 3) earnings revisions bottoming.