- While the US Federal Open Market Committee is expected to leave the Fed fund rate unchanged this month, Fed fund futures are telling us to expect changes down the road.
- As of this writing, three rate cuts are expected during 2024, the first one coming at the conclusion of the June meeting.
- Meanwhile, US stock indexes remain in strong uptrends meaning investors still see growth and earnings down the road.
As we all know by now, the US Federal Open Market Committee (FOMC, the Fed) begins its 2-day March meeting Tuesday, culminating with an announcement on interest rates at 13:00 (ET) Wednesday. As usual, there isn’t much intrigue going into the meeting as US Fed Chairman Powell has already said not to expect a rate cut this time around. The focus will be on Chairman Powell’s comments following the announcement, then when the minutes of the meeting are released a few weeks down the road. With all that as background, the last few days have seen a few questions move into the spotlight: Will there be a rate cut at the conclusion of the next meeting on May 1? How many interest rate cuts might the US see during 2024? Why don’t US stock indexes care about interest rate moves anymore? The first two of these questions can be answered with this Fed Fund futures forward curve chart.
Will there be a rate cut at the end of the April 30/May 1 meeting? Take a look at the chart. If we take the various Fed Fund futures contracts and subtract their individual value from 1%, the resulting forward curve shows us the expected Fed Fund rate over time. Additionally, it is generally accepted by investors and financial media talking heads alike that once rate cuts begin, they will occur in 25 basis-point increments. Our starting point is the current range of 5.25% to 5.5%. Looking at the May futures contract (ZQK24) priced at 94.695, the assumed rate is 5.305%, still within the existing range. However, the June futures contract is priced at 94.775, putting the assumed rate at 5.225%. This means the first rate cut is expected to occur at the end of the June 11 and 12 meeting.
This past weekend, my friends running the Barchart X-site account posted the poll question, “How many interest rate cuts might the US see during 2024?” Discounting the politically motivated responses X specializes in festering, the actual poll results showed 46% (out of 3,556 votes) came in at 1 to 2, with 0 next at 37.5%, and 3 to 4 languishing back at 11%. The Fed Fund futures market is telling us, at least as of this writing, 2024 could see 3 interest rate cuts. As discussed above, the June contract is below the current rate range. Assuming a 25 basis-point cut in June, the range drops to between 5% and 5.25%. The September futures contract shows an expected rate of 4.99% meaning the second cut come at the conclusion of the September 17 and 18 meeting. The third cut is expected to come in December with the futures contract projecting a rate of 4.695%, just outside the theoretical range of 4.75% to 5%. Could expectations change? Certainly. Are there outside factors that could come into play between now and the end of 2024? Absolutely. But for now, the market is showing 3 cuts on the horizon.
The last question is interesting, as it raises the larger issue of intermarket analysis and “normal” business cycles. The general theory is US stock indexes trend down while interest rates go up and bonds go down. Recall the Fed Fund rate sat between 0% and 0.25% from March 2020 through March 2022, the latter meeting seeing a hike to 0.25% to 0.5%. That was the first of 11 consecutive rate hikes through the July 2023 meeting resulting in today’s range. As for US stock indexes, all three major markets topped out in January 2022 before bottoming out in October of that same year. In October 2022 the Fed Fund rate was sitting between 3.0% and 3.25% (from the September meeting), meaning it has increased by 225 basis points since. Meanwhile, the S&P 500 ($INX) is up 48% from its October 2022 low through the March 2024 high (so far). The Dow Jones Industrial Average ($DOWI) is up 37%, and the Nasdaq ($NASX) has gained 63%.
Why have US stock indexes largely ignored the increase in interest rates? Again, most of the answers one finds is based on political opinion, so has to be generally tossed out. The reality is global investors continue to put money into global stock markets around the world, and they wouldn’t do that if they thought the much talked about financial apocalypse was coming. Investors are in business to make money, so when a market sector is trending up it means that collectively the industry sees stocks as a better opportunity than other sectors. As a recent MarketWatch piece discussed, this means more attention is being paid to earnings, not only quarterly reports that look backward but expectations for growth down the road.
Could these trends change? Yes, that’s what trends do. Keep in mind Newton’s First Law of Motion applied to markets (A trending market will stay in that trend until acted upon by an outside force, with that outside force usually investment money), and Newsom’s Market Rule #1 (Don’t get crossways with the trend). The canary in the coal mine could possibly be the Nasdaq for a couple reasons: First, its incredible rally mentioned above. Second, it has been leading the other two indexes since topping out during November 2021. A look at the Nasdaq’s monthly chart shows a doji forming, a Candlestick pattern indicating indecision. Still, there is time before the end of the month for the Nasdaq to change its appearance. Note I didn’t mention it having anything to do with the March FOMC meeting.
That was intentional.
On the date of publication, Darin Newsom did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
