Why a Rate Cut Has Not Been Confirmed for July

Federal Reserve Chairman Jerome Powell

Fed Chairman Jerome Powell spoke, and the market listened. After plenty of anticipation over the last few weeks, we officially have a signal from Powell himself that a rate cut is in the works.

Equities soared to new all-time highs, as marked by the S&P’s 0.60% rise and a 0.40% lift for the Dow. The Nasdaq Composite enjoyed the largest boost among the major indexes, jumping a whole 1% following Powell’s testimony.

Investors piled into a few blue chips as well, like Amazon and FedEx, which enjoyed gains of 1.2% and 1% respectively. AMZN shares rose above $2,000 per share for the first time since September of last year, right before Powell announced an interest rate increase.

But today’s Fed is a much more dovish one. Much more accommodating as well, to both banks and investors in the wake of Powell’s statements this morning.

“Crosscurrents have reemerged,” Powell remarked.

“Many FOMC participants saw that the case for a somewhat more accommodative monetary policy had strengthened. Since then, based on incoming data and other developments, it appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook.”

So, it seems the softened economy has arrived, at least in Powell’s eyes, and it’s high time to loosen the screws (yet again) on the monetary supply.

And for investors, that means the market has nowhere to go but up.

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Even though the economic outlook is officially pessimistic, at least in the short-term. The 2-year Treasury Rate fell further today, dropping to 1.86%, meaning that we’re even closer to a yield curve inversion than before.

Which, by the way, preceded the last three financial crises.

But it’s time to celebrate if you’re a market bull, slowed growth be damned. Because debt is about to get cheaper, again, boosting bottom lines for companies holding corporate debt (all of them), even if yet-to-be released economic indicators suggest a rate cut delay.

Because according to Powell, the jobs report from last Friday had nothing to do with his decision:

“I think since the June meeting and even for a period before that the data have continued to disappoint and that’s very broad across Europe and around Asia and that continues to weigh,” said Powell.

“The bottom line for me is that the uncertainties around global growth and trade continue to weigh on the outlook and, in addition, inflation continues to be muted.”

And though we’ve confirmed a rate cut, what isn’t confirmed however, is when it’s coming – the key to all of this. In the grand scheme of things, investors didn’t really learn much of anything new today, as analysts were already guaranteeing a rate cut at some point this year.

The real question is whether the reduction is coming at the end of July, or some time after. If we don’t get an official rate cut announcement on July 31, an early-August retracement is not only possible, but probable.

So, before investors get overly excited about Powell’s testimony, they need to remember that we still don’t know when the actual slashing of rates will happen. If we did, equities would be up far higher than they are this morning.

The “moderate” gains as of midday signal to me that folks are starting to realize that the “guarantees” of the last few weeks are anything but, as Powell continues to beat around the bush – prodding the markets along in hopes of keeping his options open.

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