The Return Of J-Pow
Up until Thursday it was looking like the Fed would play it conservatively and cut rates by 25 basis points on Wednesday. But then Nick Timiraos – known as The Fed Whisperer – published an article on WSJ.com that appeared on the front page of Friday’s paper suggesting that it was a closer call between 25 and 50 than markets were expecting at the time (“Size Of Fed’s Expected Rate Cut Remains Close Call Before Vote” [SUBSCRIPTION REQUIRED]). The Fed clearly reached out to Timiraos – who is its conduit to the market – to prepare it for a potential 50 basis point cut.
You can see the change in the probability of a 50 basis point cut in the chart of Target Rate Probabilities above. The market is now leaning towards a 50 basis point cut, giving it a 59% probability. The WSJ’s Greg Ip had a persuasive article on A2 of today’s WSJ arguing for a 50 basis point cut (“The Case for a Half-Point Fed Rate Cut” [SUBSCRIPTION REQUIRED]). We know from the recent rate hiking cycle that Powel isn’t afraid to act boldly and decisively – and I see no reason why he won’t this time as well. So I’m expecting a 50 basis point cut on Wednesday…..
How will the stock market react? My best guess is that investors – as always – will like the return of easy money and send stocks – which are hovering just below all time highs – through the blue line. However, I wonder if that won’t be an inflection point in which all potential marginal buyers are in the market, leaving no one else to buy. In other words, I suspect the initial market reaction on Wednesday sending stocks to new all time highs could be faded and reversed by the end of the week.
This week I’m also keying in on Darden Restaurants (DRI) earnings report on Thursday morning. DRI owns Olive Garden, Longhorn Steakhouse and a number of other restaurants patronized by the middle class. Olive Garden’s comps rolled over into negative territory the last two quarters and I suspect another weak comp in the just completed August quarter. If so, DRI may have to lower their FY25 guidance for company level comps of +1.0% to +2.0%, sending the stock lower. Top Gun has a small short position in DRI.