Be Careful What You Wish For This Week!

The next two weeks are virtually certain to be packed with huge volatility in the stock market!

This week’s Fed meeting will have traders very much on edge, to say the least! While I see virtually zero chance that the Fed will cut its benchmark interest rate (although futures discount a 21% chance), the market is bound to move dramatically during and after the post-meeting announcement and press conference. If the Fed comes off confident that the current expansion remains robust and sustainable, and, therefore, steady as she goes with the benchmark rate going forward, stocks, ironically, are going to tank. If, on the other hand, Powell cites weakening data and suggests there exists sufficient risk to the downside — enough to perhaps warrant a rate cut at future meetings — the market will rocket higher.

Yep, make no mistake, for stocks this week, bad news — as it relates specifically to the economy’s influence on the Fed — is good news.

Next week, however, brings the opposite dynamic into play. Should the highly anticipated Trump/Xi summit at the G20 meeting produce bad news — i.e., no promise of a soon-to-be-hatched trade deal, and, therefore, the certainty of escalation — stocks will absolutely tank! If, on the other hand, the two once again express their love for one another and commit to immediate resumption of talks with the goal of coming to terms on a tariff-eliminating trade deal, stocks will see new all time highs in very short order.

Back to the Fed, while conditions in the aggregate have on balance deteriorated so far this year (although our proprietary macro index score has risen the past two weeks), the expansion remains intact; to the point where there really is no fundamental reason for the Fed to turn hugely dovish. But, clearly, the on-the-ground fundamentals are not what the present is all about; the voting members absolutely know that a protracted trade war will kill the expansion, and, in the face of such risk, they may very well offer up a virtual promise of a rate cut or three this year; the first occurring at the July meeting.

If I were a member, I’d vote to send the market the following simple, neutral message:

The economy is expanding at a healthy enough pace with presently low inflation risk. As always, the committee remains data dependent and ready to act should conditions deviate markedly form their present course.

The above, while in my view being the appropriate Fed position, traders are nonetheless pricing in the promise of future rate cuts. If they get what they want, the market will rally, and, alas, Trump will feel all-the-more inclined to play hard ball next week when he meets with Xi. I.e., be careful what you wish for this week!


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