The July FOMC event is the next piece to come into focus in the larger macro picture.
What does this mean for the market as a whole? Who is likely to benefit from this? And who is likely to not come out on top?
This is who it’ll impact…
STEP ONE: The July FOMC Event
It’ll impact mortgage rates, bonds rates, the value of every major currency, and the US stock market.
Ignore the chatter about the possibility of a half-point cut; the Fed will not do this as it would be a clear sign of panic.
STEP TWO: The Dovish Shift We’ve Been Waiting For
The most recent FOMC Rate Statement did drop the word “patient”. This opens the door to easing for 2019. This is the dovish shift that the market has been watching for.
Tracking the Fed’s decisions have been largely a matter of “dot plots”, however, because that tool began in late 2011, it has never been used to track rate cuts.
The Fed Funds futures contract is also forcing the Fed’s hand as are signals from the bond market.
As near-term rates continue to flirt with the “yield curve inversion” which occurs when longer-term bond yields fall below shorter-term yield, it is clear that the bond market is projecting a rate cut. Yield curve inversions often are reduced to a recession indicator, when in reality it is simply the bond market saying that short-term rates are too high.
STEP THREE: Long Bond Positions
Traders will continue to benefit from long bond positions across the 10-year and 30-year bond. Interest rate sensitive sectors like Homebuilders, Constructions, and REITS will continue to climb. Finally, bond proxies like the Utility sector are also going to remain bullish.
“Don’t fight the Fed” will continue to fuel strength in equities, although be cautious with small caps names in the Russell.