Stocks and Bonds Sold Prior to Federal Decision; Crypto and Crude Oil Prices Increase

Implications of Retail Sales and Industrial Production Data

The recent hot retail sales print and better-than-expected industrial production data are not the kind of news that those in favor of lower interest rates wanted to hear. This comes just before a crucial decision on whether to cut rates by 25 or 50 basis points. The question arises: does the economy really need rate cuts?

Market Expectations and Trading Trends

Adding to the complexity for traders, Nick Timiraos of the Wall Street Journal suggested that withholding a larger cut could lead to uncomfortable questions. Goldman's trading desk also noted that, historically, the Federal Reserve tends to deliver close to what the market is expecting. Currently, the market is pricing in about 42 basis points of cuts. Trading began with a surge in Small Caps, particularly those stocks that are most shorted. However, this trend faded around the time European markets closed and 'most shorted' stocks returned to their previous levels. A similar pattern was observed with the Magnificent Seven (Mag7) stocks, which also saw a quick rise followed by a return to their opening levels.

Investor Activity and Market Liquidity

Goldman's trading desk observed that trading volumes were subdued and the S&P top of book (liquidity) was significantly lower, indicating that most investors are in a wait-and-see mode. Hedge funds were more inclined to sell, with short ratios elevated to 75%. Long-only investors, on the other hand, were more inclined to buy, though activity was very light. By the end of the trading day, only Small Caps managed to maintain their gains, while the other major indices remained largely unchanged.

Treasury Yields and Dollar Value

Treasury yields were higher on the day, with the short-end lagging. This left the long-end still lower in yield for the week, but the rest of the curve higher in yield. The dollar rallied modestly, ending a three-day downward trend.

Crypto and Crude Oil Prices

Bitcoin saw a significant increase, rising above $61,000 during the day and erasing the previous day's drop below $58,000. Oil prices also continued their rebound, with West Texas Intermediate (WTI) testing $72 during the day.

Gold Prices and Global Liquidity

Gold prices decreased slightly during the day, but managed to stay above $2560. The question now is whether global liquidity will catch up to the equity market's optimism, or whether the upcoming Federal Reserve decision will trigger a sell-off if the Fed reveals its concerns about a potential economic downturn.

Bottom Line

The market is in a state of anticipation as it awaits the Federal Reserve's decision on interest rates. The recent strong retail sales and industrial production data have raised questions about whether the economy really needs a rate cut. Meanwhile, trading trends and investor activity indicate a cautious approach, with most investors in wait-and-see mode. The dollar has rallied modestly, while Bitcoin and crude oil prices have seen significant increases. The question remains: will global liquidity catch up to the equity market's optimism, or will fears of an economic downturn trigger a sell-off? What are your thoughts on this matter? Feel free to share this article with your friends and sign up for the Daily Briefing, which is delivered every day at 6pm.