Good morning,
Wall Street took the FOMC meeting in stride, with benchmarks relatively little changed during the session, with moderate volatility into the close. The Fed confirmed a rate cut and signalled the start of a monetary policy easing cycle. Newly appointed official to the Fed Board and key White House economic adviser, Governor Stephen Miran dissented in favour of a 50bp cut. With Jerome Powell set to leave the Fed, the White House will soon have a clear path to “stack the board” with dovish-leaning officials that will erode independence. While stocks had only a muted reaction, the bond market sold off “on the news” with yields rising across the curve. The dollar index staged a rebound. Gold and the other PGMs saw profit-taking.
The S&P 500 -0.1% pared losses during the session to close nearly flat on the day at 6,600. The Nasdaq traded lower by -0.33% but closed off intraday lows. The Dow Jones finished in positive territory, gaining +0.57% while the Russell 2000 also pared strong early gains and a retest of the record highs, adding +0.18%. All in all, stocks had a muted reaction to the FOMC decision, which delivered into expectations at the press conference. Fed Chair Jerome Powell’s presser held few surprises – but he delivered a “dovish cut”.
Mr Powell would not be drawn on questioning over the issue of Fed independence being undermined. He also cited deterioration in the labour market and that conditions were changing. On inflation, the Chair said that tariff impact on inflation was likely to be “transitory”, but the outlook remained uncertain and there was evidence of a lot of importers and distributors absorbing higher costs and not passing directly onto consumers.
The bond market came under moderate pressure with traders “selling the news”. After an initial rally, bond yields rose after the Fed verdict, with the US 2yr rising 4bps to 3.54%. The US 10yr initially moved below 4% but then rose to 4.07% with a 5 bp gain on the day, while the 30yr closed higher at 4.67%. Bond investors seemed more concerned on the day about the longer-term inflationary impact. The dollar rebounded modestly, with the DXY adding +0.4% to 97, which is still close to the 2022 lows.
The technical price action with the US2yr yield continues to confirm a bullish skew for the treasury bond tenor. The technical setup points to the yield falling below the key 3.5% in the coming months. I anticipate this to be accompanied by further easing from the Fed, along with more deterioration in the economy and labour market. This outcome would also likely bearishly weigh on the US dollar in my view.
Carpe Diem
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