How Overheated Is The Stock Market?

Besides watching the global market PMI, the Fed must have seen the NFIB small business sentiment report where the uncertainty index was the 4th highest ever. As you can see from the chart below, the rolling 3 month average of the Fed’s usage of the terms: challenges, fears, risks, shocks, and uncertainties is elevated.

This is about trade and the global economy. Because the trade war has caused the Fed to be dovish, it might not be the best thing for stocks for there to be a trade deal (which doesn’t seem likely now). Maybe the sweet spot is where we’re at now, namely no new tariffs, negotiations, and a dovish Fed.

Powell Most Dovish Ever

In his testimony, Powell was his most dovish ever. The chart below shows the Fed was the most dovish since 2017; Powell took over in February 2018. The June Fed Minutes echoed this perspective a few hours later as it stated, “Several participants noted that a near-term cut in the target range for the federal funds rate could help cushion the effects of possible future adverse shocks to the economy.” Some needed to see more data before supporting rate cuts. The weak economic surprise index suggests they might be on board with a cut now.

2 Cuts Back On The Table

Powell mentioned that the June jobs report didn’t change the Fed’s opinion on rates as he stated, “Since the June meeting and, even for a period before that, the data have continued to disappoint.” Therefore, it’s appropriate that the chance of a 50 basis point cut on July 31st went back up to where it was before the BLS report came out. There is currently an 18.3% chance of a double cut. As you can see from the top chart below, when the Fed meeting is 19 days away, there is a 94% chance the Fed funds futures market is correct based on data from 108 FOMC meetings.

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