Stock markets are in a holding pattern ahead of the Federal Reserve’s interest rate decision tomorrow. In the two-day meeting, expect the S&P 500 (SPY), Dow Jones, and Nasdaq (QQQ) to trade in a narrow range.
Chances are high that the Fed will not change rates this week. The Bank of Canada went ahead and cut rates by 25 bps for a second time (50 bps in total). It increases the risk of the Canadian dollar (FXC) weakening considerably until September. By then the FedWatch tool assigned a 100% probability of the U.S. cutting rates.
On Friday, the BLS will post U.S. job data. If the government hired many staff, it would lead to a strong job report. This lowers the likelihood of the Fed cutting rates in September. Bond investors, however, are growing increasingly confident about lower rates. The TLT ETF is up by almost 6% in the last quarter. The 7-10 Year Treasury Bond (IEF) gained 4.02% in the quarter.
Investors are unwilling to rotate out of the mega technology firms into small caps (IWM). Lower rates would suggest the economy is weakening. Microsoft (MSFT), Apple (AAPL), Meta Platforms (META), and Amazon (AMZN) are more attractive than small-cap firms. They have the scalability, resources, and talented staff to outperform the small-cap sector.
