As we enter the new paradigm of the world of negative interest rates, it seems that the textbook jargon is evolving in tandem. In the past, rate cuts would be referred to as dovish action by the FED, but today was quickly termed a hawkish cut by market participants.
Today, July 31, 2019, the FED cut rates by 25bps and announced an end to the quantitative tightening program. Gut reaction would normally be to assume that this would be bullish stocks, bullish gold, bullish bonds, and bearish the dollar, but the contrary occurred.
Why?
The market was hoping for more forward guidance (promises) of future rate cuts, but this was not delivered by Chairman Powell and his FED.
This is visible on this Eurodollar Futures chart below. Conceptually, you need to understand that if the price lowers, then it means less future rate cuts are being priced into the market than before. The red trend lines have been drawn at 2PM when the FOMC statement was released. As market participants digested the statement and the ensuing press conference, rate cut expectations fell.
All in all, the press conference was filled with uncertainty and seemingly contradictory statements.
Going forward…
Unless, intra-meeting FED speak occurs to reverse today’s trends, I would expect stocks to weaken and gold to fall towards the lower bound of its new range of 1380 to 1440.
I am short SPY and SOX, hoping to take those potential gains and purchase more gold related securities at lower prices.