Anticipated Federal Reserve Rate Cut Announced

Today at the conclusion of this month’s FOMC meeting, the highly anticipated rate cut was announced and implemented. The Federal Reserve cut their Fed funds rates by a ¼% (25 basis points) to take the current spread to 175 bps. (1 ¾%) to 200 bps (2%). This action resulted in an increase of bullish sentiment in both stocks and gold.

As we spoke about over the last few days interest rate cuts by the Federal Reserve or global central banks typically create an exception to the inverse relationship between gold and stocks. It is one of the few occasions that creates bullish market sentiment for both asset groups.

Typically, money moves from risk on assets to safe haven assets on a perceived weakness in stocks as a safety play. However, during monetary stimulus and rate cuts the net result is both gold and stocks moving higher in tandem.

The difference between this most recent rate cut and the other two cuts which occurred this year is that Chairman Powell has signaled that they will probably pause cutting rates anymore this year. According to Chairman Powell it will take “material” change in the outlook to justify a further rate cut.

The statement released at the conclusion of today’s meeting stated that, “The implications of global developments for the economic outlook as well as muted inflation pressures”, were a result of the Fed implementing this third rate cut of the year. In today’s press conference following the statement released, Powell said that is most likely that their current policy “Would remain steady as long as incoming information about the economy was probably consistent.”

According to the CME’s FedWatch tool which yesterday predicted a 97% probability that a rate cut would be announced today means today’s rate cut was highly anticipated. At the same time this probability algorithm now shows that the likelihood of a rate cut during December 2019 is extremely remote, with the probability of the federal reserve continuing to maintain current rates is at an 80.1% probability.

Now the focus will shift from the highly anticipated rate cut to Friday’s jobs report put out by the Labor Department. Currently estimates are tepid at best. Today’s U.S. private sector ADP report indicated that employers added approximately 125,000 jobs in October, which was slightly above economic forecasts which expected beginning of 120,000 new jobs being created. Estimates for Friday’s nonfarm payroll jobs report are tepid at best and will be highly influenced by the reduction of 46,000 jobs due to the General Motors strike. Forecasts have come in as low as 90,000, and as high as 125,000 new jobs being added in October.

If in fact nonfarm payroll report comes in tepid as predicted that should provide a second stage price boost in both gold and U.S. equities.

Wishing you as always, good trading,