Trouble In The Land Of Make Believe As Stocks Plunge

Stocks had a pretty awful June 25 all around with the S&P 500 falling by about 1%. Certainly a significant change from yesterday lack of excitement.

The move lower appears to coincide with some Fed speak about future rate cuts, blah, blah, blah. The Fed only met a week ago; I doubt they changed their minds that quickly. I can tell you the economic outlook didn’t change that much in a week that future rate cuts should suddenly be in question. The only thing in question is how many cuts in July. Was the market expecting a 50 bps reduction in July? Really? I can’t remember many times the Fed cut rates 50bps at one meeting, outside of something dire going on.  Sometimes I wonder where this stuff comes from?

Fed Fund Futures

Fed Funds future do not imply two rates cuts in July. They indicate no rate cut. That is likely because the next meeting does not conclude until July 31. However, the contracts for August suggest the Fed Funds rate falls to around 2.05%, which is about 35 basis points less than the current Fed Funds rate of 2.38%. However, a 25 basis points cut would take the Fed Funds target to 2 to 2.25%, from 2.25 to 2.5%. So by my book that only implies one rate cut. Fantasyland? Maybe.

fed funds rate

The contracts for December indicate a rate of about 1.65%, about 70 basis points below the current rate. By my book that implies a range of 1.5 to 1.75%, or 3 rates cuts by year-end. Year-end! Not at the July meeting! Seriously, where does this stuff come from.

fed Funds

Yesterday, the CME rate watch tool was only showing a 40% chance of a 50 bps cut in July, today that fell to 30%. 

If that number said 60% then I could say, ok, the market is expecting it. But its not even a majority. Whatever.

2-Year and Dollar’s Non-Reaction

Anyway, the bond market and the dollar index hardly budged today. In fact, looking at the chart plainly of the 2-Year Treasury, you can’t even see the move down.

2-year

It is a little more visibly on the dollar index.

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Disclosure: Michael Kramer and the clients of Mott Capital own NFLX

Disclaimer: This article is my opinion and expresses my views. Those views can change at a moment's notice when the ...

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