Expectations from the Fed

Previously, we discussed that with the CME FedWatch Tool, traders are assigning an ~88% probability to a rate cut in July. Read Why the Fed’s Decision Has a High Potential for a Market Meltdown? to learn more. If the Fed doesn’t signal significant easing ahead, the markets could nosedive. Many analysts including Goldman Sachs, UBS, and RBC agree that the markets might be overpricing the Fed’s rate cuts this year.

Trade Resolution, Easy Fed, and Growth Can’t Hold for Long

Something needs to give

J.P. Morgan Asset Management’s market strategist, David Lebovitz, seems to agree with the previously discussed view. On June 18, while talking to CNBC, Lebovitz said that while some of the economic survey data has been softer, like the New York Fed’s Empire State business conditions index, he doesn’t think that the hard data has rolled over yet. He said at this juncture, the Fed is sending dovish signals while the economy still looks decent. Lebovitz said, “Something needs to give at the end of the day. You can’t have this impossible trinity of resolution on trade, an easy Fed, and moderate economic growth.”

Bad news is good news

Lebovitz also mentioned that he doesn’t understand the “bad news being good news” thesis. Recently, the markets have been rallying despite bad economic news. Weaker reports have increased the odds of a Fed rate cut. The S&P 500 Index (SPY), the NASDAQ Composite Index (QQQ), and the Dow Jones Industrial Average (DIA) rose 6.2%, 7.2%, and 6.9%, respectively, in June (until June 18) despite escalating trade tensions and increasing geopolitical unrest.

The US-China trade war has hit the US semiconductor industry hard. The Trump administration imposed a ban on Huawei, which restricted it from doing business with US suppliers. Huawei is one of the big chip buyers from Qualcomm (QCOM), Intel (INTL), NVIDIA (NVDA), Broadcom (AVGO), Micron (MU), and Advanced Micro Devices (AMD). Despite these tensions, the stocks gained 7.7%, 3.1%, 12.9%, 10.5%, 5.2%, and 11.1%, respectively, in June due to the expectation of a preemptive Fed.

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