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So the Fed cut rates, no surprise there. Really, there was nothing in the dot plot that was unexpected. Under Jay Powell’s leadership, the Fed thinks that neutral is around 3%, which is the level I’ve been expecting as the neutral rate for some time. So if you’re wondering why the 10-year yield rose following the rate cut, I’d attribute it to two factors: it’s still taking longer to get inflation back to 2%, and the neutral rate seems to be coming into clearer view.
Right now, the 10-year minus the 3-month spread is only 10 bps. A 3-month Treasury at 3% suggests a 10-year at 5%, based on historical spreads, and potentially as high as 6.8%. Perhaps this will change in a couple of days, and rates across the curve will collapse. I just don’t think that’s likely to happen unless we find out we’re entering a recession.
To no surprise, the VIX 1-Day rose above 20 today but managed to close lower at 14.77. The S&P 500 was hit fairly hard following the FOMC statement and the start of the press conference, largely because the volatility drop was slow to materialize. Still, it ultimately saved the day, with the index rallying by almost 90 bps between 2:50 PM ET and 3:10 PM ET.
The BOJ meeting kicks off tonight, with its decision due tomorrow evening. There will also be an inflation report on September 18, with core CPI expected at 2.7%. I would think that BOJ will stick with the narrative of pushing towards rate hikes as long as the economy continues to develop as expected. Japan’s 2- and 5-year yields look ready to surge.
Earlier in the day, it looked like the USD/JPY was ready to break down, and it did briefly. But then US rates started to rise following the Fed announcement, and the USD/JPY reversed, finishing the day higher.
So far, my thoughts on SMH trading lower haven’t worked out as planned, but you never know—it still might. Now that Nvidia is no longer allowed to sell its GPUs in China, we may even see Nvidia’s stock start to come down soon.
Mike
Defined Terms and Jargon by ChatGPT
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Neutral Rate: The theoretical interest rate that neither stimulates nor restricts economic growth.
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Dot Plot: A chart published by the Federal Reserve showing FOMC members’ projections for future interest rates.
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10-Year minus 3-Month Spread: A measure of the difference between long-term and short-term Treasury yields, often used as a recession indicator.
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Basis Points (bps): A unit equal to 0.01%, commonly used to describe changes in interest rates or yields.
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VIX 1-Day: A short-term measure of market volatility, often called the “fear index.”
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FOMC (Federal Open Market Committee): The branch of the Federal Reserve that sets monetary policy, including interest rates.
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Core CPI (Consumer Price Index): An inflation measure that excludes volatile food and energy prices, providing a clearer picture of underlying inflation trends.
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USD/JPY: The currency pair comparing the US dollar to the Japanese yen, a key measure in foreign exchange markets.
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SMH: An exchange-traded fund (ETF) that tracks semiconductor stocks.
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GPUs (Graphics Processing Units): High-performance chips, such as those made by Nvidia, widely used in artificial intelligence, gaming, and data centers.
Disclaimer
This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
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This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
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