What does a First Fed Rate cut really mean?

5月3日

ANALYSIS ON FED STANCE
Powell has consistently indicated that interest rate decisions would hinge on economic data, a stance reaffirmed by the unchanged rates in the latest policy announcement. Despite the Fed's clarification that rate cuts are unlikely until there is more certainty that inflation is consistently heading towards the 2% target, some still question if this is truly a dovish stance.

Persistent high inflation has led to adjustments in the market's expectations, now reflecting only a 45% likelihood of a single rate cut by September—down from earlier predictions of three cuts this year. I maintain that even this adjusted forecast is overly optimistic. (drawn and extrapolated on the chart above)

Powell emphasized that the Fed requires more than a month or two of data to influence policy changes, pointing out that the data from the most recent quarter has been particularly concerning. This sentiment is reflected in the market's behavior, with rising yields and ongoing corrections in equities.

Market volatility remains high, especially around Federal Open Market Committee (FOMC) announcements, evidenced by significant selling in both the Nasdaq ( IXIC) and NYSE on high trading volumes. In light of these conditions and Powell's recent remarks and the elevated volatility, I've chosen to scale back my market exposure back to nearly 100% cash for about 3 weeks now.

WHAT DOES CUTTING RATE REALLY MEAN FOR STOCK MARKET
I have calculated all the times when there has been a First Fed Rate Cut and extrapolated the 6-month % change and the 12-month % change following this First Fed Rate Cut.

Assuming that this can happen in September (currently about 45% chance that rates will be cut in September based on the CME FedWatch Tool), then I have plotted the results using a black line. This is the average of the 24 times since 1921 that the Fed has made a FIRST rate cut.

It is clear that the average scenario is very bullish with an average 12month change around +14-15% on the SPX . However, what is more interesting is that if we look at the times where there is a rate cut without having a recession the scenario becomes very strong.

The real concerns of the FED is that we might get reaccelerating in inflation. We are currently in a goldilocks situations, since even though inflation is a little high, the economy is growing and we are not overheating (much better position than EU economies, which are not growing so fast and would have to cut faster). Rates currently are about on average where they would be on a long term 5-year history. This reaccelerating fear is based on events happened before in 1970s and 1980s. You can see in the picture below and what the FED looks to avoid. If you are interested to play with the data, I have made the tool available in my script section.



INDICATOR
https://www.tradingview.com/script/Eq72DJ6M-BT-NedDavis-Series-CPI-Minus-5-Year-Moving-Average/

RAW DATA
Feel free to use the raw data of the First Fed Rate cut for further analysis below. Source: Bloomberg Finance L.P.
05/05/1921 -12.01 9.87
05/01/1924 11.96 33.8
04/23/1926 11.29 12.82
08/05/1927 10.16 14.29
11/04/1929 13.87 -7.96
02/26/1932 -37.46 -29.83
04/07/1933 76.34 81.66
02/05/1954 16.7 39.39
11/15/1957 4.04 28.53
06/10/1960 -6.72 6.00
04/07/1967 8.65 3.64
08/30/1968 2.35 -6.84
11/13/1970 21.26 7.00
11/19/1971 18.61 24.04
12/09/1974 41.76 41.68
05/30/1980 16.75 17.29
11/02/1981 -7.43 16.02
11/21/1984 7.92 21.7
06/06/1989 10.31 17.17
07/06/1995 10.93 22.28
09/29/1998 21.11 26.4
01/03/2001 -4.26 -7.78
09/18/2007 -11.93 -22.78
07/31/2019 7.43 -2.05
Mean 9.9 14.43
Median 10.23 15.16