Republic Risk: The Fed Preview

The central bank won't cut rates today. But what will the economy look like in September?

Equity Storm Watch Is YELLOW on the S&P 500 and GREEN on the Russell 2000

We’ve seen some improvement in the SPY conditions as the index pushed back above the 50-day moving average. Tech stocks, especially AI names like Super Micro Computer (SCMI), remain under pressure. The stock has lost about 35% in the last two months as the frenzy for this tech starts to fizzle. 

Futures are kicking off Fed day on a strong note, up over 1% this morning thanks to a rebound in tech stocks and significant news out of Japan. The Bank of Japan raised its interest rate by 0.25%, causing the yen to strengthen significantly against the dollar, now trading at 150.

As Japan seeks to normalize its monetary policy, its plan includes cutting bond purchases and boosting Japanese banks. It's unclear how this will impact the carry trade, which sees trillions of yen move offshore to capitalize on higher rates in the U.S. This move narrows the spread between borrowing rates in Japan and abroad.

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Dear Fellow Expat: 

Good morning. 

It’s all eyes on Federal Reserve Chair Jerome Powell, who is set to deliver remarks today following the conclusion of the Fed's two-day FOMC meeting. 

The markets anticipate a rate cut for September, although a string of “mainstream” economists argue that the bottom is in. Yesterday, Claudia Sahm said the Fed should just cut at today’s meeting and previously suggested that the central bank is “playing with fire” by not taking action sooner rather than later. 

Of course, the mainstream view is that inflation will come down on its own. Don’t worry; CPI is at 3%, exactly where it was in June 2023. It hasn’t changed in a year; yet, economists are taking a victory lap. And they’re not counting food and energy in the readings because who needs either as an American, right? (/sarc)

These computations used by mainstream make me scratch my head.

Paul Krugman deducted food, housing, and energy from the broader inflation readings and claimed victory over rising prices. He was lampooned for this.

Others will cut “outliers” on a bell curve - even though the things at the end of the bell curve are necessities.

The economic growth they’re touting has relied on massive government borrowing that has shown depreciating returns on investment since the 1960s. We’ve pumped tons of money into infrastructure, EV charging stations, and other pet projects, and the money hasn’t produced a lot of things to point at. Even politicians, desperate for a ribbon-cutting ceremony, wonder when these projects will commence.

The last mile of the Fed's fight against inflation is the hardest, and they’re not there yet. The market would welcome a cut to rates for some time.

But keep in mind that we’ve been borrowing 7% of GDP to effectively print 3% in growth. None of this is sustainable, and the further this is kicked down the road, the worse it will get for the private sector. 

Perhaps that’s the plan.

The Fed’s decision today comes on the heels of a surprise private payrolls report this morning. Reports show that the country showed job growth of just 122,000 new positions, down from 155,000 in June. The losses were noticeable in the private sector, with big declines in professional services, IT, and manufacturing.

This Friday’s report will likely show a continued government and healthcare job growth trend.

How to Trade the Fed

Watch for the market to pick a direction between 2:34 p.m. and 2:37 p.m. Typically, we see the market scream higher around this period, followed by a likely selloff in the afternoon as funds use any pops in prices as a reason to take profits. I’ve written about this anomaly before and how to trade it. You can see a preview here.

Then, after the market closes, another round of crucial tech earnings is due, with META (META), ARM (ARM), and Qualcomm (QCOM) delivering results. After the big move this morning, expect a bit of a fade and some choppiness headed into the 2 o'clock hour.

Looking to Earnings

After the close yesterday, there was a tale of two tech reports: Microsoft reported a slight miss in Azure cloud-services revenue, with growth at 30% and an expected slowdown next quarter, causing an initial 8% sell-off in after-hours trading before recovering and settling down 2%. On the flip side, AMD beat expectations, with CEO Lisa Su raising revenue forecasts to $4.5 billion, up from $4 billion, due to the success of its MI300 AI graphics chips driving AMD's shares up by 7% in after-hours trading.