Market Concerns: Will the Fed Cut Rates?

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By Ronald Tech

The stock market took a significant hit, experiencing a 1.5% drop following the recent earnings report, prompting doubts about a rate cut by the Federal Reserve in March.

Federal Reserve Chair Jerome Powell expressed hesitancy towards cutting rates, given the strong performance of the economy, which grew by approximately 4% in the second half of 2023, while unemployment remains below 4% and inflation has yet to meet the target.

From his vantage point, Powell sees no immediate necessity for action, considering the market’s proactive easing of financial conditions, reminiscent of the aggressive measures taken since the financial crisis and pandemic.

If the market desires a rate cut, it must offer a compelling reason to justify such a move.

One possibility could be to tighten financial conditions, thereby causing concern at the Federal Reserve regarding overly stringent policies.

In the interim, with the market guiding the way, Powell can afford to exercise patience and maintain his current course.

Perhaps the market is adapting, as indicated by the possible breakout of the CDX High Yield spread, eliciting “bullish” momentum for broader spreads, along with the rise of the implied correlation index for various time frames.

The market displayed a pattern of volatility, witnessing a surge in the SPX followed by a downturn, primarily triggered by Powell’s suggestion that a March rate cut was improbable.

The forthcoming days will be critical, particularly following the release of Mag7 earnings, which might exert added pressure on the short-volatility dispersion trade.

It’s worth noting that implied volatility levels substantially decline post-earnings, causing a rise in the S&P 500’s Implied Volatility.

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Presently, everything seems to be unfolding according to expectations; the focus now shifts to monitoring whether this trend will persist, eventually leading to a notable decrease in the S&P 500 over the upcoming weeks.