When are rate cuts coming?

We get the next policy statement from the Fed on Wednesday and if they are going to start lowering interest rates in March, there should be some hint at that prospect next week. If not, then rate cuts may not happen until the summer months. The stock market loves low rates so this could be a significant meeting even if there is no policy change as Chair Powell should hint we are getting close to “normalizing” rates.

CORE PCE

Looking at the numbers, the inflation outlook has been improving and the Personal Consumption Expenditures (PCE) reported on Friday was +2.6% while the GDP on Thursday was a healthy +3.3%. One would think there is no rush to cut rates with these numbers and it is possible inflation turns higher if growth remains at these levels. This may be what keeps the Fed on hold until later this year and take a wait and see approach. Remember, it was only a year ago that most economists predicted a recession for 2023 (didn’t happen) so it is best to take the current consensus of several rate cuts this year with a grain of salt.

The 10Yr Treasury

The chart below of the 10Yr Treasury is very interesting as it looks to have established a trend to the upside denoted by a 5-wave sequence. Without diving into the details of Elliott Wave analysis, this means yields should drop to near 3.25% over the next year before resuming the trend to higher yields in the coming years. Too early to know exactly how much higher 10Yr yields will go until we see where the green wave ‘2’ terminates but it is likely north of 6.5%. In the short-term, we should see 10Yrs push up to 4.5% before turning down again.

10Yr Treasury Yield Chart by @kiscocap

The S&P 500

The S&P 500 pushed higher this week but it looks extended from the moving averages in the chart below so we may be due for some rest at these levels. Also, the Relative Strength Index (RSI) at the bottom of the chart is now in the overbought zone which we have not seen since the July top. So, maybe we get a pullback in February if the Fed’s policy statement disappoints the market on Wednesday. If not, then the trend will likely continue higher at a slower pace.

S&P 500 Chart by @kiscocap

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Paul J McCarthy III

President, Kisco Capital

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.