July 31, 2019 / 6:25 PM / 2 months ago

U.S. markets gyrate after Fed cuts rates, stocks fall

NEW YORK (Reuters) - Wall Street turned negative after Federal Reserve Chairman Jerome Powell characterized the U.S. central bank’s first rate cut since 2008 as a “mid-cycle adjustment to policy,” suggesting the move was not the start of a lengthy series of rate cuts.

FILE PHOTO: Federal Reserve Board Chairman Jerome Powell testifies before a Senate Banking, Housing and Urban Affairs Committee hearing on the "Semiannual Monetary Policy Report to Congress" on Capitol Hill in Washington DC, U.S., July 11, 2019. REUTERS/Leah Millis/File Photo

In a press conference, Powell then clarified that the Fed was not committing to just one cut or “a long series of rate cuts.” U.S. stocks initially barely moved after the Fed said it was cutting interest rates, as expected, citing concerns about the global economy and muted U.S. inflation, and signaled a readiness to lower borrowing costs further if needed.

HIGHLIGHTS:

** Fed cuts target interest rate 25 basis points to 2.00-2.25%, citing implications of global developments for the U.S. economic outlook and muted inflation pressures

** Fed vote in favor of policy was 8:2, George and Rosengren dissented

** Fed says it will conclude reduction of its aggregate security holdings in August, two months earlier than previously indicated

** Fed says rate cut supports committee’s view that sustained economic expansion, strong labor market and near-target inflation are the most likely outcomes but uncertainties remain

** Fed says lowers interest on excess reserves rate to 2.10%

MARKET REACTION:

STOCKS: The S&P 500 .SPX was last off 0.93%, after falling more than 1%. BONDS: The 10-year U.S. Treasury note US10YT=RR yield see sawed, rising above 2.06%, then turning down to 2.0161%. The 2-year yield US2YT=RR rose above 1.95% and was at 1.8821%.

FOREX: The dollar index .DXY was 0.58% higher.

COMMENTS:

JAMES RAGAN, DIRECTOR OF WEALTH MANAGEMENT RESEARCH, D.A. DAVIDSON, SEATTLE

“There was a meaningful expectation that there might be a 50 basis point cut, I think the futures suggested about a 20% chance,  and I think a lot of investors felt that if it didn’t come at this meeting, if it was only 25 basis points, that there would at least be a path to a next rate cut. I think Jay Powell has been pretty careful not to suggest when the next rate cut might be or even if there is another rate cut.”

JIM PAULSEN, CHIEF INVESTMENT STRATEGIST, THE LEUTHOLD GROUP, MINNEAPOLIS:

“My feeling is that what started off the firestorm was a comment by Powell that suggested we’re one and done. Later, he sort of backed away from that, and stocks rallied back a little bit after that.

“At the outset, there was a little disappointment by some that there wasn’t a 50 basis points cut, but I think the bigger thing was the suggestion that they did a mid-cycle adjustment and they’re done.

“I do think this (market) will calm down a bit once he gets off stage. If the economy is OK, how short do you want to be?”

RICK MECKLER, PARTNER, CHERRY LANE INVESTMENTS, A FAMILY INVESTMENT OFFICE, NEW VERNON, NEW JERSEY

“The fact he said it was just a mid-cycle adjustment ... it was interpreted that more rate cuts are not necessarily coming as opposed to a pattern of rate cuts.”

“This was an extremely telegraphed move. Too many people looked to buy in front of the move and the move is just what’s expected you don’t get the immediate, so then they give it up to the sellers. That’s trader positioning.”

“Longer term investors see lower rates as a positive. I’d be surprised if the market didn’t come back to unchanged or up if not today in the coming days.”

“It’s an unusual situation where Trump has put tremendous pressure on the Fed. You have to put in the politics of not wanting to be seen as giving in to President. He’s probably being less than transparent if his plans coincide with what the President wants.”

“Rate cuts are typically done at a time when the economy is slowing so it’s always a mixed message. At the end of the day lower rates for most investors are the key reason to be long stocks. It takes away a lot of alternative choices when rates are low.”

KEN POLCARI, MANAGING PRINCIPAL, BUTCHER JOSEPH ASSET MANAGEMENT,NEW YORK

“This cut was already priced in, so he didn’t do any more than what the market was expecting. Now in his speech, he is not shutting the door but he is also not saying there is another one coming in September, so hold on. And that is not what the market was expecting to hear. They talked about 50 basis points there for a couple of weeks, they even intimated it, then they pulled right back on it. So 25 we knew, and when is the next one coming? Basically, he didn’t say when the next one was coming, not that he said it isn’t coming, but he didn’t say September is going to be the next one. So the algos and the traders are going to throw a temper tantrum, they are going to hit the sell button until they get what they want.

MARK GRANT, CHIEF GLOBAL STRATEGIST, B. RILEY FBR INC, FORT LAUDERDALE

“Today’s announcement will have a profound effect on both borrowers and investors as the borrowers benefit, including corporate borrowers who can refinance both investment-grade and high-yield bonds, and the American government, who will pay a much lower interest rate on Treasuries.

“Mortgages will get refinanced in droves, I believe, and it will be a positive for individuals with student loan debt, equity lines of credit and any debt that is pegged to LIBOR or any other of the floating rate indexes. REIT’s, in my opinion, will also gain from the Fed’s new strategy and whether it is a single REIT, or a closed-end fund of REIT’s, as both classes of assets should benefit as they can refinance their debt at lower and lower rates.

“On the negative side will be the pension funds, that will adversely affected by a prolonged period of low interest rates. It will also make it more difficult for retirees and senior citizens who depend upon their cash flows, to lead their lives.

BRAD MCMILLIAN CHIEF INVESTMENT OFFICER, COMMONWEALTH FINANCIAL NETWORK, WALTHAM, MASSACHUSETTS

“I think the Fed actually hit the sweet spot in what they are saying here. One of the concerns about a rate cut is the Fed saying things are a lot worse than you think. But that’s not what the Fed is saying at all. This really is designed as an insurance cut, they are saying it as clearly as they can.”

“They don’t talk about what those risks are (which warrant a rate cut). They leave it undefined. They say job gains have been solid on average, so I think there is a recognition that some of the volatility in the jobs numbers may have raised the risk going forward.”

“I think the Fed sits tight, I don’t think we get a cut in September. The Fed has indicated very clearly that this is an insurance cut and they’re going to wait and see.”

“Markets got what they wanted. There’s a natural tendency to buy the rumor, sell the news. I think there may be some disappointment that it wasn’t 50 basis points, and there wasn’t more of a hint that more cuts were coming, but I think that is going to be a short term reaction because you have the Fed essentially ratifying that the economy remains solid.”

HUGH JOHNSON, CHIEF INVESTMENT OFFICER, HUGH JOHNSON ADVISORS, ALBANY, NY

“It is very clear the market has built in three cuts - one now and one in maybe December and one maybe a year from now. The level on the yield on the 10-year Treasury and on stock prices is basically lined up with that outcome. The reason I cautioned everybody is the numbers more recently have been modestly better than forecast, and I think you’re going to see that also on Friday with the employment numbers.

“Two additional cuts are not written in stone by a long shot, and there’s been some talk about a pause. The reason it’s a little big negative is that three cuts was good news for the decline in interest rates we’ve seen and also the rise in stock prices. Now you start to raise doubts about (the additional) cuts, then that’s not good news for the stock market.”

TONY BEDIKIAN, HEAD OF GLOBAL MARKETS, CITIZENS BANK, BOSTON

“It was largely as expected – no major surprises with the 25 basis point cut. The Fed’s still citing the move because of muted inflation and global developments.”

“There was not a whole lot more forward guidance other than what we’ve heard in the past. They acknowledged strong labor markets, recent reasonable signs of moderate growth. It still leaves the playing field wide open as to what they’re going to do in future months.”

“Market reactions were pretty muted. It looks like the markets had this largely anticipated which we all kind of expected. The rates market is pretty stable at the moment – what that tells me is that this lands right on market expectations.”

HEIDI LEARNER, CHIEF ECONOMIST, SAVILLS, NEW YORK

“I don’t think this is putting dramatic pressure on the market. We’ll see during the press conference whether the tone is a little more dovish. I wouldn’t automatically expect a second cut come September. They talk about uncertainties about the outlook remaining even after today’s move, but when they say as they contemplate the future path, it doesn’t really strike me as language that indicates there’s a real emergency.”

“There were a few people who expected a 50 basis point cut, but because I see this more as an insurance cut it’s not clear to me they need to follow this up with another cut.”

COLLIN MARTIN, DIRECTOR OF FIXED INCOME, THE SCHWAB CENTER FOR FINANCIAL RESEARCH, NEW YORK

“The Fed is trying to thread the needle, they are trying to indicate that this is a preventative measure, an insurance cut and not because the economy is so gloomy.”

“The Fed signaled that it is going to be data dependent but markets were priced for a more dovish outlook which the Fed did not deliver on.” 

“Markets were priced for a quarter-percentage-point cut but maybe they were looking for clarity that a second cut would be coming soon, some sort of a calendar based guidance.”

JACOB OUBINA, SENIOR U.S. ECONOMIST, RBC CAPITAL MARKETS, NEW YORK

“If you look at the probabilities going into this thing, it was actually slightly dovish because of ending the runoff earlier than expected. Most people thought that was a relatively low probability event because the payoff from that is not significant. The Fed right now is very much worried about narrative and signaling, so this for them was basically a freebie. We end two months sooner than expected, it doesn’t really do anything for the economy, but from a signaling standpoint it’s just this mantra that we’re going to do whatever it takes to maintain the expansion remains in place. That makes this slightly more dovish. The 25 basis point cut was widely expected. The dissents are not surprising. These are two of the more hawkish members of the committee historically, it’s not surprising that they wanted to maintain rates unchanged. And the overall tone left the door open, they are going to continue to monitor events, they’re worried about global growth etc. so unless you get a material pickup in, let’s say, European PMIs etc, I think we’re probably primed for another 25 basis point cut in September.”

ERIC DONOVAN, MANAGING DIRECTOR, OTC FX, INTEREST RATES, INTL FCSTONE

“I can’t believe the 10-year is within a one basis point range in the last 15 minutes. There is essentially no reaction. You heard a lot of people saying a quarter-point was priced in. That’s the wrong way to look at it, but suffice to say this was exactly what the market was expecting and this is what the market got.

“This is the most dissent we’ve had in the current Fed; we had two hawkish dissenters on this decision. The outcome is a little bit more hawkish than what people were thinking going in. For the most part, on a scale of 1 to 5, with 1 being very dovish and 5 being very hawkish, this is a 3 or 4. This is a little  bit more hawkish than what the market was really expecting, not by a large margin, but it certainly leaves the door open for a one and done.

“The market gets what it wants, as we continue to see more data coming, the Fed is not laid the groundwork for additional cuts in the near future.”

TOM HAINLIN, GLOBAL INVESTMENT STRATEGIST, U.S. BANK’S ASCENT PRIVATE WEALTH MANAGEMENT GROUP, MINNEAPOLIS

“The people were looking for a couple of things - would they actually do the 25 (basis point cut), which they did. It was right in the middle of what everybody was expecting. They kept the language in about being data-driven and that leaves the door open for cuts. So you have like 2-3 cuts in 2019 and one more in 2020; that is the outcome the market has priced in and nothing changed that narrative today. They got the 25 (basis point) cut, they got the commentary and statement, they have to continue to evaluate data, that inflation is running below 2%, that global risks remain out there.”

“They have left the door open so now they will have to sit and assess probabilities of additional rate cuts throughout the year based on how the data comes in. That should have more volatility around FOMC meetings, because if you priced in two more cuts and there are only so many meetings left before the end of the year that pressure will likely build as the year unfolds.”

MICHAEL ANTONELLI, MARKET STRATEGIST, ROBERT W. BAIRD, MILWAUKEE

“Everybody knew there was a 25 basis point cut happening. That was priced into the market. Maybe the camp who wanted 50 basis points are disappointed and that caused the initial sell off.”

“Once the press conference begins we could get all sorts of movement. The statement said uncertainties on their outlook would remain and they would act as appropriate. That could mean they’re ready to cut again this year but maybe the press conference will give us a little more insight.”

Americas Economics and Markets Desk; +1-646 223-6300

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