Chart Advisor: No Cuts No Bull

By Gordon Scott, CMT

1/ The Case for No Fed Cuts in ‘24

2/ Jobs Reports Support No Cuts

3/ Is the Downtrend About to Begin?

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1/

The Case for No Fed Cuts in ‘24

This week the Fed’s Open Market Committee (FOMC) will meet to discuss the possibility of a change in the Fed’s overnight interest rates. The consensus prediction among analysts is that they will leave rates unchanged this meeting.

The bigger concern is what they will do the rest of the year. A few months ago, market watchers all felt safe predicting that the Fed would cut rates three times before the summer was over. Now there is a growing concern that the Fed may not cut rates at all. 

Consider the following price charts of prediction market contracts. These contracts, traded on Kalshi.com, allow people to trade on how many Fed rate cuts will occur in 2024. The price of the contract can only go from 0¢ to $1.00, so it doubles as a probability measure (i.e. a contract priced at 30¢ has a 30 percent probability of occurring).

These charts compare the price trends of a contract for 0 rate cuts this year with the contract for 3 rate cuts this year. As of April 10th, both of these seemed to reverse their trends. Before that time, the contract for 3 rate cuts was priced above thirty cents, and the 0 rate cuts contract was around ten cents. Now their prices are nearly reversed. 

With the 0 rate cut contract priced at 38¢, market participants are expressing their view that the Fed might not cut rates at all in 2024. There is one data series that supports that possibility, and it will also get a new data point this week: the NonFarm Payroll report.

2/

Jobs Reports Support No Cuts

The Nonfarm Payroll report has shown evidence of surprising job growth in the middle of an economy fast becoming famous for layoffs. Even though big tech firms have implemented multiple layoffs this year, the chart below shows that more people are getting hired than expected. This is a trend that has lasted for five consecutive months.

The Fed doesn’t want to cut rates if they think inflation is going to hang around. One factor that predicts inflation is job growth, because, in theory, a highly employed workforce is the foundation for resilient consumer spending. If this trend continues, the Fed will be less inclined to cut rates any time soon, and the possibility that they will forego cuts this year grows.

3/

Is the Downtrend About to Begin?

The stock market has been banking on Fed cuts up until this month. That’s why the S&P 500 index (SPX) has been showing a downward drift over the past few weeks. The big question is whether or not this down drift will become a downward trend that may last for several weeks or months. 

Though price action is never a perfect predictor of future trends, we don’t have to look very far back in history to see that what is happening right now, has happened less than a year before. 

These two charts show how the Stochastic 30,5 line (an oscillating indicator which measures unusually strong upward or downward price action), hit its low range last year three times, and that the first time it hit, it made a succession of lower highs to over a period of three months. Is it possible a similar pattern could repeat? Unless the FOMC meeting, or the jobs report, generates optimistic news this week, SPX could break through its recent lows and start a new downward trend.

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Originally posted 29th April, 2024