SPDR S&P 500 (SPY)

[ITMS]

Here's Another Market Conundrum, Cut Rates Or Don't Cut Rates?

This morning, the highly anticipated June non-farm payroll was released at 8:30 am ET. The report was much better than expected with 224,000 new non-farm jobs announced. The expectation was for 160,000 new jobs, so this was a hot number. Private payrolls also were better than expected with 191,000 new jobs, expectations were for just 160,000.

The S&P 500 Index has been soaring since June 3, 2019 when it traded as low as 2728.81. At that low, the Federal Reserve said it would do what was necessary to keep the expansion going. This comment fueled the S&P 500 Index to new all time highs. Recently, the markets have been surging higher on the back of weak economic data and the anticipation of a rate cut by the Federal Reserve later this month. Today's strong job number now puts the Federal Reserve in a tough position to raise rates. Bond yields on the 10-year U.S. Treasury Note are surging higher today by 11 basis points to 2.065%. Earlier this week, yields on the 10-year have been below the psychological 2.0% level.

In this bizarre stock market it seems that bad news is good news and good news is bad news. The European Central Bank (ECB) and the Bank of Japan (BOJ) both have negative rates already and this is a problem for their markets and economies. German economic data was very weak today as manufacturing orders dropped 2.2% month on month in May and down 8.6% from the same month in 2018. This is probably why the U.S. Dollar Index (DX) has been very strong over the past year or so. Weak European economic data will keep money coming into the U.S. Dollar.

The yield curve has now been inverted for about a month now. If yields on the 10-year U.S. Treasury Note rise then the markets will be less likely to price in a 50 basis point rate cut in late July when the FOMC meets again. Many traders and investors are banking on this cut by the central bank, hence the recent stock market rally on weak and bad news. Perhaps, the Federal Reserve will cut rates by just 25 basis points in late July. Will the markets be disappointed by this as it has already been expecting a 50 basis point cut? If rates rise significantly from here then it could signal that there might not be a rate cut at all in late July. That may not be good for stocks since they seem to be hoping and expecting more easy money policies by the central bank. Here we are again, the markets face another conundrum.




Nick Santiago
InTheMoneyStocks