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By Lewis Krauskopf
NEW YORK (Reuters) – Trade tensions between the United States and China weakening markets, investors are counting on the support of US Federal Reserve shares wishing to continue to cut interest rates to help the US. US economy to avoid a severe retreat.
We are generally expecting a quarter-point rate cut when the Fed releases its next press release on Wednesday, which would be the second largest reduction of this type in the central bank after July's rate cut. the first time since 2008. This puts more emphasis on the indices much further, the Fed will go.
"If the Fed gives forecasts that suggest less than what the market thinks, then you will likely see the markets sell," said Jamie Cox, managing partner of Harris Financial Group in Richmond, Va. "As long as the Fed will continue to play with the prices charged by the markets … I think the markets will be very stable."
The Fed's 180-degree pivot, which tightened monetary policy last year by easing, contributed to the strong overall performance of the stock market in 2019. The S & P 500 () benchmark has climbed 20% this year and reached unprecedented highs.
In July, the central bank had reported signs of global slowdown, latent tensions between the US and China and a willingness to boost inflation too low to bring down borrowing costs .
The markets are counting on a probability of nearly 90% that the Fed is gaining another point, moving from its current overnight credit rate of 2.00% to 2.25%, according to the group's FedWatch tool CME. According to FedWatch, there is a probability of about 65% that the Fed will get at least a further quarter point reduction by the end of the year.
"The market is going to want to see that we are going to focus on a reduction and that others are coming," said Keith Lerner, market strategist at SunTrust Advisory Services in Atlanta. "They want to know that the Fed is vigilant and will act aggressively if necessary."
This raises the importance of the last set of interest rate trajectory projections of policy makers – the so-called point graph – which will be published with the rate decision. UBS economists said in a note that they expect the decline to be global by 2019, but only plans two cuts in total for the year, which could irritate investors and a US president eager to adopt a more aggressive stance.
President Donald Trump has frequently criticized the Fed for failing to cut rates more quickly and more significantly, as the Fed chairman he named being Jerome Powell being the main target of his anger.
The decision by the European Central Bank on Thursday to cut interest rates and revive a broader stimulus package could further encourage the Fed to lower interest rates, as the ECB may weaken the Fed's interest rates. The dollar against the dollar and thereby pushing up the price of US exports – an issue that vexes especially Trump.
Mr. Powell, who will give a press conference after the release of the statement from the central bank, made comments that rocked the market, including in July, when he said the cuts in the rates of the bank might not be the beginning of a long easing campaign supporting the economy.
"Every meeting allows Jay Powell to say something that disrupts the markets a bit," said Arthur Hogan, chief markets strategist at National Securities Corp.
Powell "has enough experience to know that he does not want to move markets or make new ones," he added.
According to research by Allianz (DE 🙂 Global Investors, on the last eight cycles of easing since 1981, four are "insurance" cycles, with economic problems looming as economy is not in recession, while four were pre-recession cycles.
A year after the start of a cycle of easing, the S & P 500 index has risen an average of 20.4% during insurance cycles, while the price of the S & P 500 index has risen by 20.4%. index fell an average of 10.2% during the cycles preceding the recession, according to Allianz.
"Historically, what they do now, which is to reduce rates in an economy that is not in recession and that runs no imminent risk of recession, has been positive for the stock market," he said. said Mona Mahajan, investment strategist in the United States. at Allianz.
The stock market as a whole has generally responded well to a second rate cut, as it would be on Wednesday, with the Dow Jones Industrial Average () rising 20.3% a year later, according to Ned Davis Research. The weakest performance was recorded when the Fed tried to prevent a recession, without success.
The probability of a recession in the next 12 months is close to 38%, its highest level in a decade, according to the New York Fed recession indicator, based on the yield curve of the New York Fed. US Treasury. Last month, US two-year bond yields outperformed 10-year bonds, a reversal of the yield curve perceived as a precursor to a recession.
The escalation of the tariff war between the United States and China contributes to economic uncertainty and is one of the main concerns of equity investors. At the end of last month, an important speech by Powell was relegated to the background when Trump published tweets that exacerbated trade tensions.
"I think it's important that the Fed helps ease the financial conditions and reduce the likelihood of a recession," said SunTrust's Lerner.If the fight against tariffs only intensifies, the effect of the Fed will be less. "
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