Market doesn’t want to need a rate cut
(These are the market notes on today’s action by Mike Santoli, CNBC’s Senior Markets Commentator. See today’s video update from Mike above.) For the past three weeks, my line has been that the market wants an interest-rate cut soon but it doesn’t want to need one. Investors collectively expect cuts to resume the week after next, a conviction reinforced by a run of soft-ish labor-market readings this week, but are hoping it will occur in a steady economy — as “insurance” or “normalization” cuts, not a rescue effort for flagging growth. This take has worked reasonably well in reading the market’s rotational balancing act near all-time highs, and to this point Wall Street is still positioned for its preferred scenario to play out. Outside of the slackening in the jobs market, other data are “good enough” to maintain the half-full take — Thursday’s decent ISM services number the latest example. This idea of “just the right amount of wrong” to bring lower borrowing costs has allowed the tape to take a prolonged pause without sustaining much of a broad pullback after finishing July a bit overheated. Here’s the S & P 500 since mid-year: traded below the July 31 high as recently as Wednesday; since May, index pullbacks have been contained to 3% wobbles or less. Treasury yields are sliding and rate-sensitive sectors are moving higher, as if Friday’s payroll report will be close enough to forecasts for 70,000 net new jobs to affirm an easier Fed without an outright loss of jobs, which might have yields falling further for the “wrong” reasons. Homebuilders ahead by almost 3% Thursday, regional banks up almost 1% as a group. Small-caps outperforming , though only by a little. For what it’s worth, the implied volatility of potential moves in Treasuries and the dollar off tomorrow’s jobs print are getting pretty juiced. It could mean some rapid repricings and ultimately a “clearing event” for markets, given that it could settle the debate over the Fed in September. (After Friday, Fed officials go into their pre-meeting quiet period.) Here’s the ICE MOVE Index, the Treasury market’s version of the VIX: Decent breadth under the surface of the S & P’s half-percent bump, t he equal-weight version of the index roughly keeping pace. The Nasdaq-100 peaked on a relative basis nearly a month ago, and the S & P 500 has managed to hold within a slim margin of a record high since. As everyone constantly says, valuation is not a good market-timing tool. But maybe it’s not fully coincidence that in the current bull market the Nasdaq-100 has been repelled each time it’s approached or touched 28-times forward earnings? The pullbacks have been resets of prices and expectations and periods to allow profit forecasts to catch up.
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