Fed Chatter, Prudence taking over

Markets stalled waiting for directions

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Our View

Forget all the news; let’s get to the nitty-gritty. The markets have weakened over the last two days as more Fed headlines surfaced. Some Fed officials have started discussing a slower pace for rate cuts, and the markets reacted accordingly. With only 13 days (10 trading days) until the election, everything is in motion. Gold closed higher for the sixth consecutive session, reaching a new all-time high. Treasury yields also pushed higher, with the 10-year note yield spiking to 4.2% for the first time since July and settling at 4.18%. Crude oil also rose, closing up 2.2% after hitting $72.09 per barrel.

The ES and NQ opened lower, dropped 10 points (remember my rule about buying the lower open or the first drop after the open), traded down to 5862.25 at 9:32, and then rallied 42 points to 5904.25. There was a lot of two-way price action, but it seems like the index markets might have a case of the yips. The Fed has indicated it's still on track for rate cuts in November (6-7) and December (17-18). However, with bond yields falling so much, it doesn’t seem likely the Fed will lower rates by another 0.50 bps. In fact, it looks like the Fed may have made a mistake by cutting rates by half a point earlier, as it has definitely pushed yields back up. It feels like the clock is ticking, and not in a good way. While you can still buy the 30 to 50 point pullbacks, it seems like some risk-off trade is already in play, which explains why the ES and NQ struggle later in the day.

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