July Rate Cut? Wait For The Fed’s Complete Capitulation To Get Aggressive

Financial markets now anticipate that the Federal Reserve will begin ratcheting down rates from the 2.25%-2.50% range in July. Remarkably, the “de facto stimulus” associated with the Fed flip from rate raising to rate neutrality only lasted for six months.

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crazy-rate-change

Reasonable criticism of the Fed’s “way-too-low-for-way-too-long” rate policies notwithstanding, weak economic data may support easing. Imports (-2.7%) as well as exports (-4.2%) contracted. And global manufacturing is the weakest that it has been since 2012.

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In a similar vein, corporate profits are downbeat. First quarter (Q1) earnings came in at -0.4%. Equally disconcerting, analysts are forecasting -2.1% for the second quarter (Q2).

In truth, earnings estimates may be too optimistic. Citi’s Economic Surprise Index has been, for the most part, decidedly negative.

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citi-econ-surprise

Perhaps the biggest kicker? The jobs slowdown. According to the private payroll processing firm ADP, companies only created 27,000 new positions in May. That was the weakest reading since job losses bottomed out in March of 2010.

Even the Fed’s own recession model indicates trouble. The 30% probability marker preceded the three previous recessions. Will the fourth time be an unlucky charm?

Keep in mind, 30% likely matters in the recession prediction game. This is because the New York Fed’s model is a lagging indicator.

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nyfed-recession-probabilities

Perhaps ironically, stock investors are literally banking on a few strategic rate cuts to do the trick. Indeed, U.S. large-cap stocks remain within spitting distance of an all-time peak.

Many may be misreading the tea leaves, however. When the Fed shifts from tightening to neutrality to easing, the Fed is often powerless to stop assets from repricing lower.

The shocking truth? The first few rate cuts after a tightening cycle heralded the last three recessions.

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ETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser ...

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