Markets Rate Expectations are Misaligned with Fed

05/23/2019 11:46 am EST


Bill Baruch

President and Founder, Blue Line Futures

Major markets are weaker as Fed revealed it was less likely to cut rates later this year than what is priced in the market and dollar strength hits crude and gold, points out Bill Baruch.

E-mini S&P (ESM)

Yesterday’s close: Settled at 2857.50, down 8.50

Fundamentals: U.S benchmarks are flirting with losses in the 1% ballpark after minutes from the latest Fed meeting and Flash PMI data. Yesterday afternoon, those minutes exuded the Fed is less likely to cut rates than what markets have seemingly priced in. Additionally, Fed Chair Powell’s comments on slow inflation being transitory is an opinion more widely held among members. If inflation does pick up in the back-half of the year, it could price-out a rate cut altogether.

This morning, the CME’s FedWatch Tool shows a 70.2% probability the Fed cuts rates this year. One reason interest rate futures are signaling such an outsized probability of a rate cut versus the Fed’s more patient rhetoric is simply that economic growth globally is worsening amidst a backdrop of already low rates. Our belief dating back to 2017 was that rates are ultimately trending lower for longer. Overnight, Manufacturing data in Japan contracted. This morning, German and Eurozone PMIs and German Business Climate data all worsened and came in below expectations (Manufacturing PMI contracted). Data to this degree not only lights a fire under Treasury prices but it echoes the ongoing effects of the U.S-China trade war. This is where stocks find themselves this morning, under immense pressure once again now that fundamentally we can see deteriorating conditions due to trade. U.S Flash PMIs are due at 8:45 am CT and if these come in below expectations, we are likely to see continued selling in equities. However, a better than expected read should help turn sentiment. New Home Sales are due at 9:00 am CT. At 1:00 pm CT we have a slew of Fed speakers Barkin, Bostic, Daly and Kaplan.

Technicals: Yesterday, the S&P 500 failed again to get out above trend line resistance that could be drawn back to the all-time highs on May 1. We noted this here yesterday and had major three-star resistance at 2870.75-2872.50. This technical failure has opened the door for continued waves of selling and ultimately what has been a bleed-out since last night.

Crude Oil (CLM)

Yesterday’s close: Settled at $61.42, down $1.71

Fundamentals: This is a failure in crude oil in the final leg of a seasonally bullish push. Yesterday’s inventory data was bearish with builds across the board much larger than anticipated while estimated production bounced back 100,000 barrels-per-day. But the selling really picked up this morning after Flash PMIs in Europe echoed the ongoing deterioration in global conditions caused by the U.S-China trade war. Adding pressure on commodities broadly is a strengthening dollar. These effects have outweighed geopolitical tensions in the Middle East ahead of the long weekend.
Technicals: Crude oil is below the 200-day moving averages at $60.46 and the psychological $60 mark. The tape is bearish.

Gold (GCM)

Yesterday’s close: Settled at $1,274.2, up 1.0

Fundamentals: Gold is responding to global weakness and negative rates after another weak read on European PMIs. The German 10-year Bund has been in negative territory since decisively cutting through zero on May 7 and after a two-day reprieve rates are again heading lower. U.S Treasuries are also surging with the 30-year hitting a two-month high. All the while the U.S. Dollar Index is attempting to breakout. Yes, dollar strength is holding back gold from further gains but at a bare minimum it is nice seeing the metal respond to global weakness. U.S Flash PMIs are due at 8:45 am CT and this will be key for the currency trade, a miss here will bring some relief to the Euro and allow gold to truly capitalize on the global weakness. However, a better read on U.S PMIs could quickly force gold to pare today’s early gains. New Home Sales are due at 9:00 am CT. At 1:00 pm CT we have a slew of Fed speakers Barkin, Bostic, Daly and Kaplan.

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