Will the Fed Disappoint Next Week?

I had every intention of coming home at lunch on Thursday morning, and buying ETFs for a near-term bounce. (I execute personal trades at home, and thus do most of my trading around noon.) However, I am beginning to wonder if the Fed is setting the market up for disappointment next week.

On Tuesday, the Fed funds futures market was pricing in the odds of a 50 bp cut at 100%, and an additional 0.25% at 50%. On Thursday, the market was pricing the odds of a 50 bp cut at less than 100%.

On Thursday morning it dawned on me that it is entirely possible that the Fed may not cut at all. With news of a $7 billion fraud at SocGen, speculation has it that SocGen was heavily liquidating, and putting and inordinate amount of stress on the market. Also, relative to expectations, Thursday's release of the weekly new and continuous jobless claims was fairly positive. With the Fed cutting 75 bps inter-meeting - an act widely viewed as a move to stabilize equity markets - it may be that the Fed will feel the need to re-assert its independence.

If equities weren't collapsing around the world, there is no way the Fed would have made that cut on Tuesday. And if markets had not been collapsing, would the Fed decrease the funds target by 1.25% at the regularly scheduled meeting next week? I doubt it. I don't know if they would have cut by 0.75%.

I think the stock market may be setting up for significant disappointment. Could the Fed cut another 0.50%? Absolutely. But I think the market is under-estimating the odds of a smaller cut or even no cut at all.

My guess is they go 0.25% because if they stand pat, stocks will get rocked. A cut of 0.25% would be seen as a disappointment but the market is so oversold, and anyway, a rally could ensue after the initial sell-off.

Therefore, I am going to sit on the sidelines and wait for the Fed meeting, with one exception. I repurchased a small portion of the ProShares UltraShort REIT ETF (SRS), at $110. The REIT ETF (IYR) was hitting resistance, and acting poorly in a good tape. I'm not going to go all-in because of the meeting next week, but I think the risk/reward is decent at these levels.

Comments

[cheesecake]

i agree, 25 at best and if god loves me 0. market tanks either way :) (short term expectation, long term it tanks for sure).