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The Fed cut rates by 25 bps at its meeting today and announced that it would end QT on December 1. This wasn’t surprising to me—the only question was the timing of QT’s end, and it appears they chose the later date. Even so, the Fed’s actions will bring the balance sheet to a steady state. Additionally, Powell took a December rate cut off the table for now, saying no decisions have been made.
The announcement helped push interest rates and the dollar index higher, but with the BOJ and ECB both meeting on Thursday, we’ll have to wait to see how those events impact the dollar.
Thursday and Friday are settlement dates, and funding pressures are likely to rise, which probably means greater use of the standing repo facility as well. Surprisingly, the SRF was still used today, with just over $10 billion running through it.
Let’s not forget that Friday is not only a settlement date but also a month-end, which means the greatest funding pressures are likely to occur then.
In terms of the stock market, the S&P 500 finished the day flat, while the RSP equal-weighted index fell by more than 1.1%. As a result, the S&P 500 Dispersion Index closed above 40, its highest level since April. With earnings from Microsoft, Alphabet, and Meta tonight, and Apple and Amazon tomorrow, we should start to see this dispersion index begin to decline as implied volatility levels fall and the volatility dispersion trade unwinds.
That should lead to implied correlations rising as the trade unwinds, and the spread between the Dispersion Index and the Implied Correlation Index beginning to narrow, which could result in the stock market reversing its recent rally.
We just have to wait and see, because everything I have laid out since July has finally come together.
There is not much left for me to say.
-Mike
Glossary by ChatGPT
Balance Sheet – The total assets and liabilities held by the Federal Reserve, used to manage liquidity and monetary policy.
Basis Point (bps) – One hundredth of a percentage point, commonly used to describe interest rate changes.
BOJ (Bank of Japan) – Japan’s central bank responsible for monetary policy, including interest rate decisions and asset purchases.
Dispersion Index – A measure of the variation in stock performance within an index, often reflecting differences in volatility or sector behavior.
ECB (European Central Bank) – The central bank for the Eurozone that sets monetary policy for member countries using the euro.
Implied Correlation Index – An options-based measure estimating how closely stocks within an index are expected to move together.
Implied Volatility – The market’s forecast of a security’s future volatility, derived from options prices.
Quantitative Tightening (QT) – A process where the Federal Reserve reduces its balance sheet by allowing securities to mature without reinvestment, effectively tightening liquidity.
Repo Facility (Standing Repo Facility or SRF) – A tool allowing banks to borrow cash from the Federal Reserve in exchange for high-quality collateral, used to manage short-term funding needs.
Settlement Date – The date when trades are finalized, and cash or securities are exchanged between parties.
S&P 500 Dispersion Index – An index measuring the cross-sectional volatility of S&P 500 constituents, often used to gauge divergence among stock movements.
Disclosure
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.
Subscribe to receive this FREE daily commentary directly in your email
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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