Daily Brief - Walking on air

TLDR: The beginning of the rate cutting cycle is a bearish signal for the market. The larger the cut, the more bearish.

In the classic gag, Wile E. Coyote walks on air as long as he does not look down. Once he realizes his predicament, gravity ensues. We might be in a similar situation.

Why did the market rally hard? For the longest time rate cuts were seen as a driver of bull markets, a proxy of the Fed that served us so well for the last 15 years. Traders have played hard into this narrative and pushed the market high, in expectation of a strong dovish signal, maybe even a ‘double’ rate cut.

This FOMC is not afraid of being hawkish. Whilst you were not paying attention, the Fed has just unwound 4 years of QE. Whilst taming inflation - and leading the market to their all-time high to boot (or at least not hindering its rise). J-Pow’s tenure will be remembered as a masterful exercise in monetary policy-making. This is a Fed that has not shied away from taking action when needed. Which leads us to the next point…

If this FOMC feels the need to be dovish, it means they see bad things on the horizon. QE is proceeding, inflation is being tamed but still above 2%, the market is ebullient. Why cut? Because the Fed is seeing a slowdown coming.

From tomorrow markets might be looking down like Wile E. Coyote. Do not forget that the market peaks very close to the first rate cut. In fact, the market might be peaking just at the rate cut this time. Be wary of your equities. The times, they are a-changing.

How to trade it

For allocators, long treasuries + overwrite your equity longs.

For traders, sell the news. All the longs that posted profits into the Fed, will take those profits tomorrow.

Market Movers: Post a 50bps Rate Cut

Here are the top 3 and bottom 3 performing sectors, according to their 1-month returns, following previous 50 bps rate cuts by the FED:

Top 3: S&P Health Care: 2.25% S&P Consumer Staples: 1.87% S&P Technology: 1.57%

Bottom 3: S&P Materials: -0.57% S&P Utilities: -0.72% S&P Energy: -1.15%

Earnings Spotlight: FedEx reports tomorrow

FedEx (FDX) is set to release its first-quarter Fiscal 2025 earnings on September 19, with Wall Street analysts anticipating earnings of $4.84 per share, reflecting a 6.4% increase year-over-year. Revenue is projected to rise 1.1% to $21.91 billion. The company has exceeded consensus EPS estimates in seven of the last nine quarters, bolstering optimism.

Analysts attribute the expected growth to FedEx’s ongoing cost-reduction strategies, which could save $4-5 billion annually, and the potential value of its standalone FedEx Freight division. However, risks such as the loss of the USPS contract and broader economic challenges in the parcel industry may impact future performance.