Bonds: Treasuries
(Washington)
The Fed meeting yesterday was not what everyone expected. While the central bank did cut rates 25 basis points, the commentary was far from what investors expected. The attitude on the Fed had turned so dovish prior to the meeting that some thought Powell might cut rates by 50 bp. The whole meeting took a different course, with the Fed saying this was just a “mid-cycle adjustment” and refusing to commit to a further cutting plan. This upset markets, with indexes all diving over 1%.
FINSUM: We think this was smart from the Fed and ultimately good for markets. It left things more uncertain as to policy and direction, which means stocks will trade more on fundamentals. This reinstates the “wall of worry” that always seems necessary to build bull markets.
(New York)
Rate cuts are going to send shares higher and bond yields lower, right? A win-win for portfolios. Not so fast, as the effect a Fed cut will likely have on portfolios could be anything but predictable. The truth is that monetary easing is not the economic steroid it once was, and investors know it, so the odds of a pop in the market seem low. This is doubly true because much of the possible gain from rate cuts has already been priced in by the market due to how well the Fed has telegraphed this move. If any stocks should do well, it would be small caps, which are more reliant on borrowing and thus would gain the most from lower rates.
FINSUM: This cut has been so anticipated that it will likely be greeted by a shrug. If anything, we think there are more downside risks.
(New York)
Barron’s has published an interesting article which argues that there are ten asset bubbles waiting to pop in markets. According to an analyst cited in the publication, further coordinated global central bank easing is likely to exacerbate these bubbles and turn a “run-of-the-mill recession into a full blown financial crisis”. The ten asset bubbles cited are in the following asset classes: US government debt, US corporate debt, US leveraged loans, European debt, Bank of Japan Balance sheet and related equity holdings, unprofitable IPOs, crypto and cannabis, growth and momentum stocks, software and cloud stocks, ETFs (especially fixed income).
FINSUM: So the whole world is in a bubble except the asset class that most people pay the most attention to—US stocks. The thing about many of these “bubbles” is that the economy is still plenty healthy to cover them (such as companies’ ability to cover interest etc).
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(Washington)
The Fed has historically been the level-headed kid at the party, always trying to calm things down when they got out of hand. But that appears to no longer be the case, as Powell surprised even the most dovish investors with his very soft statements last week. What comes next may shock markets—some think the Fed will make a rare 50 bp cut in their July meeting. How the market would react is anyone’s guess (likely positive initially). “Historically the Fed has wanted shock and awe when they ease”, says the CIO of Northwestern Mutual Wealth Management.
FINSUM: The Fed seems like it wants to go big, despite the fact that unemployment is at record low levels and prices are stable. The central bank clearly wants to keep the bull market rolling.
(Washington)
Goldman Sachs thinks the Dollar might be in a for big surprise. On top of his grumbling about the Fed not lowering rates quickly enough, President Trump has been tweeting about the unfair advantage that other countries have in lowering their value against the Dollar. Trump apparently wants a weak Dollar to help the US compete more effectively in the global economy. Accordingly, Goldman Sachs think there is a good chance that Trump uses some special tool to intervene and weaken the currency, such as through the Treasury department.
FINSUM: This is not as unprecedented as it sounds. Even Powell has said the Treasury is the traditional power in charge of exchange rate policy. This would likely have a big impact on markets.
(Washington)
Jerome Powell’s performance could not have been much better. He gave exactly what the people wanted—dovishness. In fact, if anything, he was almost comically dovish, disregarding the very strong jobs performance last month. No matter though, investors are pleased as it now looks nearly 100% likely the Fed will cut rates later this month, and seems as though they will stay on a cutting path for some time. The Fed’s shift in policy appears to affirm that they are currently considering the condition of the global economy as a major threat to the US.
FINSUM: The Fed is in a pretty easy spot if you think about it. Inflation is very low, markets want cuts, and the global economy is looking weak. Simple solution with no real downside—cut rates.