Ton of Wall Street is expecting the Fed to cut interest rates in coming days, but the question is by how much? For the most part, economists dive in one of two camps – a 25 basis-point cut or a 50 basis-point cut. But according to one White House official, half-a-point is just not going far sufficient. White House Economic Adviser Larry Kudlow appears to prefer to see the Fed cut interest rates by 75 basis scores when they meet for a two-day meeting next week, telling Fox Business:
“I will say the market is expecting three 25-basis level rate cuts between now and year-end…my own personal view and the Fed is independent…I would just say the sooner the better…I think that’s the president’s way of thinking…I think the fed’s target rate should drop by 75-basis points.”
Q2 GDP Up 2.1% Not bad considering we have the very heavy superiority of the Federal Reserve anchor wrapped around our neck. Almost no inflation. USA is set to Zoom!
— Donald J. Trump (@realDonaldTrump) July 26, 2019
What’s Derange Street saying about the rate cut? It’s a mixed bag, with analysts suggesting either that a possible recession is looming one more time the economy or that it’s off to the races for the stock market once the Fed makes its expected move.
Fed Thrusts Bull Economy Into the Spotlight
JPMorgan analyst Nikolaos Panigirtzoglou believes that current low sell depth figures present a sell-off risk. In this scenario, just a few large buy or sell orders can skew the unimpaired market and create a mini-bubble or a selloff, both of which no investor would be particularly happy to see right now.
According to Panigirtzoglou cited in CNBC:
“In our viewpoint, this persistently low market depth leaves U.S. equities vulnerable from here if central banks fail to validate merchandise expectations or U.S. recession risks resurface.”
This school of thought believes that if the Federal Reserve does not extricate an interest rate cut to stimulate investment and deepen market volumes, a massive selloff is all but inevitable. Given the relative delicacy of America’s bull economy, such a selloff risks setting off a recession which would be both an economic and governmental problem going into the 2020 presidential campaign cycle.
Alongside JPMorgan in this group of bull vend skeptics are Goldman Sachs and UBS Group, both of which have publicly stated that they think the S&P 500 is at or reticent to its real value with little chance of upside.
Wise words from the oracle of Omaha pic.twitter.com/S5tu691xC8
— Thomas Lee (@fundstrat) July 27, 2019
‘Bull Stock Exchange Not Going Anywhere for Now’
On the other hand, an opposing school of thought believes that rumors of the bull market’s nearing death are greatly exaggerated. According to Neil Dutta, head of economics at Renaissance Macro Research, the problem is that the guesstimates that inform market fundamentals are out of step with reality.
Retail and industrial figures have exceeded the less cautious estimates put forward by Wall Street over the past two months, and this to him is a sign that it is analysts who are misreading mercantile data. Along with other bullish analysts, he believes that shallow market depth does not of necessity imply oncoming doom but could mean that investors are waiting on the sidelines with hefty war chests in front of the Fed’s expected rate cut.
RBC Capital Markets chief U.S. economist Tom Porcelli encapsulated this optimism in a report that was recently cited in Bloomberg:
“Right now the Fed is harsh when growth prospects are nowhere near weak and Fed funds is close to neutral. Risk assets should genuinely love this setup.”
What seems clear at the moment is that regardless of the bull market’s performance, Palisade Street’s investment bellwethers are applying caution. We can only wait for the market’s reaction to the Fed announcement.