Mosaic Chart Alerts
The outlook dims for Federal Reserve rate cuts.
In this post, I’ll focus on setups that I’m monitoring for both long and short positions. With a chart and short write-up, this is a quick way to scan and plan potential trades.
These ideas are the end result of my process to identify stocks offering the right combination of growth fundamentals along with a proper chart setup.
Stock Market Update
The Federal Reserve held short-term interest rates steady as widely expected following their latest meeting this week. But Fed Chair Jerome Powell also poured cold water on any hopes of a high probability interest rate cut at the next meeting in September. During his press conference, Powell made it abundantly clear that the price stability portion of the Fed’s mandate is taking precedence relative to full employment. Powell specifically stated that “inflation is further from our goal than employment” while recognizing that labor market data has remained strong.
Powell also made it clear that the Fed wants to err to the side of caution by leaving rates too high to fight inflation, as opposed to making a policy mistake by lowering rates only to see inflation accelerate and leading to even more restrictive monetary policy down the road. The hawkish take has markets repricing the outlook for rate cuts, with market-implied odds pointing to just one quarter point rate cut this year. The 2-year Treasury yield is also starting to rise and is moving toward 4.0%. The 2-year tends to lead changes in the fed funds rate, and is also suggesting just one rate cut for the foreseeable future.
Recent reports on economic activity aren’t helping the case for rate cuts either. This week’s ADP report on private sector payrolls showed a 104,000 increase in jobs during the month of July. That comes ahead of Friday’s government payrolls report which is expected to show 106,000 jobs created during the month. This week also saw the advance estimate of second quarter gross domestic product (GDP), which came in at 3.0% annualized growth and was well ahead of estimates for 2.3% growth during the quarter. If there was any concern in the report, it’s that real final sales to domestic purchasers rose just over 1.0% during the quarter. That’s a good measure of underlying demand, and has decelerated since the third quarter of last year (dark blue bars in the chart below).
The stock market can withstand higher interest rates for longer as long as the economic outlook remains intact, which translates to higher corporate earnings. While some reports on the underlying economy have been mixed (i.e. the components of the GDP report mentioned above), the weight of the evidence shows growth is holding up and rising liquidity is supporting the risk-on move in the market.
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