October 30, 2019 / 6:24 PM / 20 days ago

Instant View: Markets take Fed cut, pause signal in stride

NEW YORK (Reuters) - U.S. stocks firmed slightly and yields on Treasuries gyrated in narrow ranges on Wednesday after the Federal Reserve lowered interest rates for the third time this year, while signaling it might pause its easing cycle.

FILE PHOTO: Federal Reserve Board building on Constitution Avenue is pictured in Washington, U.S., March 19, 2019. REUTERS/Leah Millis

In cutting its fed funds target rate by a quarter of a percentage point, the Fed dropped a previous reference in its policy statement that it “will act as appropriate” to sustain the economic expansion - language that was considered a sign for future rate cuts. Instead it stated it will “monitor the implications of incoming information for the economic outlook as it assesses the appropriate path” of its target interest rate.

HIGHLIGHTS:

** Powell says it would take a material reassessment in the outlook for Fed to change policy stance

** Powell says trade policy developments could bode well for business confidence

** Powell says the U.S. consumer does not seem to have been affected so far by weakness in other sectors of the economy

** General Motors strike is likely to have subtracted a couple tenths off gdp this quarter, but will rebound - Powell

** Fed cuts target interest rate 25 basis points to a range of 1.50-1.75%, as expected

** Fed vote in favor of policy was 8 to 2

** In change to wording, Fed says will continue to monitor incoming information “as it assesses the appropriate path” for the federal funds rate target range

** Fed sets interest on excess reserves rate at 1.55%, maintaining spread from top of fed funds range at 20 bp

MARKET REACTION:

STOCKS: U.S. stocks extended slight losses then turned higher, with the S&P 500 .SPX last up 0.4%. BONDS: The 10-year U.S. Treasury note US10YT=RR yield firmed then fell to 1.7803% and the 2-year yield US2YT=RR rose then fell to 1.6096%.

FOREX: The dollar index .DXY firmed then slipped and was last off 0.2%.

COMMENTS:

JASON WARE, PARTNER & CHIEF INVESTMENT OFFICER, ALBION FINANCIAL, SALT LAKE CITY (by email)

“The Fed doesn’t directly control the long-end of the curve, so they can’t do much there except try to fine-tune monetary policy to support economic growth and reasonable inflation levels (which is asserting indirect influence). For it’s those two factors – growth and inflation – that ultimately determine longer-term interest rates. Over the short-run, it’s also the natural emotions of fear and greed among investors that move long-term bond yields but this is outside of anyone’s control so it’s moot to consider.”

“In sum, if the Fed keeps rates low the short-end of the curve should behave. And if they support the economy and encourage some level of inflation the long-end should also ultimately take care of itself. Taken together this should provide – to the extent they can – benign conditions for the slope of the yield curve.”

BRAD GASTWIRTH, CHIEF TECHNOLOGY STRATEGIST, WEDBUSH SECURITIES

“The stock market still offers some of the best yields out there, if you compare it to fixed income, where yields are next to nothing. What happened today is certainly positive for the stock market, and the market is reacting that way.”

MICHAEL PURVES, FOUNDER AND CEO, TALLBACKEN CAPITAL ADVISORS, NEW YORK  

“The language and the policy change was as expected. It’s an affirmation that the equity and credit markets have been arguably more right than the bond market. The bond market seems to have been predicting much more dire economic conditions. Part of the reason that equities are not moving is that the Fed is affirming that things are pretty good. You saw that in the GDP print this morning. So this certainly will cause some commotion in the bond market and reaffirm equity and credit markets’ more bullish posture. The bond market, I’ve been arguing, is distorted and unusual this year, so much so because of the rest of the world’s weakness.”

CANDICE BANGSUND, ASSET ALLOCATION MANAGER, FIERA CAPITAL, NEW YORK

“The Fed met the market’s expectations with a 25 bps cut. The accompanying statement conveyed a subtle compromise for the hawks and the doves regarding the future trajectory for policy.  In a surprising hawkish-leaning development, the Fed removed the statement that policymakers will “act as appropriate” to sustain the expansion. However, the Fed cushioned the blow somewhat and reinforced that policymakers are not on a pre-set path and will continue to monitor incoming economic data before committing to their next move.

“This supportive language will ultimately endorse the central bank’s data-dependent approach, with the Federal Reserve leaving the door open to further stimulus if warranted – helping to appease both the hawks and the doves.”

LESLIE FALCONIO, SENIOR STRATEGIST, UBS GLOBAL WEALTH MANAGEMENT, NEW YORK

“Right now, the market is not really pricing in anything until next year now in terms of another ease. For the first time in quite some time, market expectation and Fed intention have converged, because for a very long time, the market was well ahead of what the Fed was guiding.”

“I think a lot of the market pricing out future rate eases really has to do with the shift in market sentiment: the fact that there’s a ceasefire with China, the fact that a no-plan Brexit is a very small percentage (risk). So because of this, the market’s expectations of continued or worsening slowing growth is less. So what (the market) did is, they took out some eases. That could change very quickly. There’s nothing in writing with trade. But we take from this that the three insurance cuts are in, and now it’s going to be more about what happens with the data.”

BIPAN RAI, NORTH AMERICAN HEAD OF FX STRATEGY, CIBC CAPITAL MARKETS, TORONTO

“There are some takeaways here that suggest that their insurance phase might be done.”

“By and large the market was positioned for a less dovish or a hawkish cut today, but there aren’t any conclusive signals that the Fed is done just yet. Instead what we got was a language change that has still somewhat left a bit of ambiguity in there. We’re interpreting it as a signal that the Fed will remain on hold for a little while, but again there could be some out there that are a little bit disappointed that there wasn’t really a smoking gun here that the Fed is absolutely done. “

KATHY JONES, CHIEF FIXED INCOME STRATEGIST, SCHWAB CENTER FOR FINANCIAL RESEARCH IN NEW YORK

“It was pretty much as advertised. They managed to cut rates but not indicate a commitment to further rate cuts.”

“I would say their description of the economy was a little stronger than I would have thought.  The labor market is strong, job gains solid, household spending rising at a solid pace – all that would indicate that they’re emphasizing that everything is good right now. That would probably indicate that the consensus is not that they would need to cut a whole lot more.”

CHUCK TOMES, ASSOCIATE PORTFOLIO MANAGER, MANULIFE INVESTMENT MANAGEMENT, BOSTON

    “People were looking for a higher probability of another rate cut in December and now the Fed has moved to potentially going on pause and making the decisions going forward to be much more driven by the underlying economic data and how that comes out.

    “At an initial glance it is not necessarily either a massive negative or positive for risk assets. It’s more that going forward the outlook for risk assets, whether stocks or other risk assets, will be driven by how the underlying economic data comes to fruition over the next period of time.”

BRETT EWING, CHIEF MARKET STRATEGIST AT FIRST FRANKLIN FINANCIAL SERVICES IN TALLAHASSEE, FLORIDA

“It was a quarter-point cut and a dovish message on a forward basis. On Dec 11, they meet again. Our expectation is that without a Phase 1 (U.S.-China trade) deal signed in November, another quarter point would be solidified without a Phase 1 deal. If a Phase 1 deal is signed, they have an opportunity to actually be data dependent or allude to that.”

ROBERT PAVLIK, CHIEF INVESTMENT STRATEGIST, SENIOR PORTFOLIO MANAGER, SLATESTONE WEALTH LLC, NEW YORK

“It’s as was expected. The market’s not doing much right now. It’s trying to assess what the Fed said.”

“It’s left the markets in a bit of a black hole as it doesn’t know what the next move will be. This is a bit of a change from what we’ve been seeing over the past year or two.

This is almost a distant association of what we’d get under a Greenspan Fed, where you don’t know what the heck they’re talking about.”

    

MICHAEL ARONE, CHIEF INVESTMENT STRATEGIST, STATE STREET GLOBAL ADVISORS, BOSTON

“The market certainly was expecting the 25-basis point rate cut, that is what we got. The thing that is interesting is folks seem to be zeroing in on this change from the Fed saying they were going to act as appropriate to now something towards they are going to assess the conditions, perhaps suggesting removing the word ‘act’ means they are less likely to cut rates in the future. I’m not so sure that is the intent here but certainly in the first few minutes folks seem to be zeroing in on that.

“From my perspective, what is interesting is you still had the dissenters to keep rates at the same level, so there seems to be a continued lack of unity about the path forward for interest rates. But the other important signal is that Bullard didn’t dissent meaning that with this cut, at least from his perspective, we are closer to being done with this mid-cycle adjustment.

“The market is assessing that we are closer to the end of Fed rate cuts at this point. The move in 2-year and 10-year yields over the last couple of weeks upwards suggested that bond investors thought the Fed was going to be near the end of this mid-cycle adjustment. The reaction of the markets today and rates suggest investors are concluding, rightly or wrongly, that the Fed is close to being done with their cuts. If you think about the target Fed funds rate is now roughly in line with their preferred measure of inflation, so it would seem to continue to cut rates would be a bit aggressive at this point.”

MICHAEL CHANG, U.S. RATES STRATEGIST, SOCIETE GENERALE, NEW YORK:

“It’s a hawkish cut and that’s what we have been expecting. It think it makes sense given that one of the key reasons why (Fed Chairman) Powell has taken a dovish stance this year has been on the back of tail risks tied to Brexit and the U.S.-China trade war. Seems those tail risks have subsided by a good amount over the last few weeks. And U.S. data looked a little bit okay, although there is some weakness here and there. But as long as the tail risks are not as severe as a few weeks ago, I think this is the appropriate action for now.”

JACK ABLIN, CHIEF INVESTMENT OFFICER, CRESSET WEALTH ADVISORS, CHICAGO

“The Fed delivered exactly what the market expected, lower rates and a more or less just vague outlook. Stocks have been feasting on continued lower rates. If the market slows down in anticipation of an economic slowdown, will the Fed respond and keep lowering rates? My sense is that they probably will.”

JIM POWERS, DIRECTOR OF INVESTMENT RESEARCH, DELEGATE ADVISORS, CHAPEL HILL, NORTH CAROLINA

“It’s pretty much what was expected. The more important outcome is they removed the phrase “act as appropriate.” It looks like the market is taking that to mean that there will be a pause in the declining rate path they were on beforehand. That’s what was expected, and that’s generally a good thing.”

“The economy is pretty good and we’re not in favor of lowering rates in a good environment.”

Compiled by Alden Bentley

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