This Week

There’s little mystery heading into Wednesday’s Fed decision, with a 25-basis-point cut all but expected. The real focus, as always, will be on the tone and message from the Powell presser at 2:30. Still, the market isn’t pricing in much volatility around that either. We’ll find out soon enough if that assumption of low volatility is correct. Before diving into this week, let’s first catch up on some weekend news.

• Stock futures are little changed after record Nasdaq close; investors await Fed meeting - Live Updates (CNBC)

  • The market was last pricing in a 96% certainty that the central bank will lower interest rates by a quarter percentage point, according to the CME FedWatch Tool. It’s pricing in a smaller likelihood, of 3.6%, of a steeper half percentage point cut, fed funds pricing shows.

• The $14 Trillion US Stock Rally is Seeking a Fed Cut Playbook (Bloomberg)

  • A $14 trillion rally that has taken stocks to record highs is heading for an inflection point next week, with investors expecting the Federal Reserve to resume cutting interest rates at its long-awaited monetary policy meeting.

  • The S&P 500 Index is up 32% from its April lows, buoyed by bets that the Fed will lower borrowing costs several times this year, and a 25-basis point reduction on Wednesday is seen as a lock. Bullish traders may have history on their side: The index has been 15% higher, on average, a year after cuts resumed following a pause of six months or more, data from Ned Davis Research going back to the 1970s show. That compares to a 12% gain in the same period after the first cut of an ordinary cycle.

  • The worry is whether the Fed has acted quickly enough to head off an economic hard-landing that would undercut the case for stocks to rise further. Though growth remains relatively strong and corporate profits are healthy, ominous signs have cropped up in recent data, including a jobs report that showed unemployment at its highest level since 2021.

• 'Worst kind of setup for the Fed': What Wall Street is saying about the central bank's next rate decision (Yahoo Finance)

  • Weak labor market data overshadowed a sticky inflation print last week, keeping investor expectations intact that the Federal Reserve will cut interest rates at its policy meeting on Wednesday. Government data released Thursday showed that consumer prices rose 0.4% in August from the previous month, an uptick from July's 0.2% increase. Meanwhile, separate data showed weekly jobless claims rising to 263,000 — the highest in nearly four years, up from a revised 236,000 the prior week.

• Options Traders Craving Volatility Look Past Fed to Jobs Data (Bloomberg)

  • Even as the Federal Reserve meeting and $5 trillion quarterly triple-witching options expiry loom over the equity market, volatility traders are also circling the upcoming jobs data on their calendars. The Fed is expected to cut interest rates on Wednesday and quarterly equity options on stocks, exchange-traded funds and indexes will expire Friday in an event that some say clears out dealer positions. While those ordinarily look quite enticing for traders betting on bigger market swings, this time they aren’t expecting volatility to make an immediate return.

• The Market’s Riskier Than It Used to Be—and Investors Love It (WSJ)

  • First, it is much more concentrated in a handful of stocks than in modern times. That means investors who simply track the market are taking much more single-stock risk than in the past.

  • Second, the stocks that dominate the market are heavily exposed to one big bet, on generative artificial intelligence, into which they are expected to pour almost $400 billion this year.

  • And third, everyone agrees that those stocks are phenomenal and bound to go up, creating a form of groupthink vulnerable to a sudden reverse on any setbacks.

• A New Wave of Bank Mergers Is Just Getting Started (Barron’s)

  • Regulatory restrictions are easing, and financial institutions are hungry for deals. The market reaction, however, hasn’t been completely positive. President Donald Trump’s looser financial regulation has helped send bank mergers to a four-year high—and more are on their way. Risks and opportunities abound.

• More Americans Are Stuck With the Jobs They Can Get, Not the Ones They Want (WSJ)

  • The faltering U.S. labor market is pushing more Americans into part-time work and other roles they don’t want, and that don’t always pay the bills. The official unemployment rate in the U.S. remains low at 4.3%. But under the surface, there are deepening signs of struggle for people looking for stable, full-time work in a time when hiring has slowed significantly.
    

As mentioned, the SPX is only pricing a 1.2% move for the week with not much concern as to what the Fed will do or say. One of the more interesting things to watch this week is whether treasury yields continue to move. There’s been an uptick in volatility during the run of economic data leading into this rate decision, and the question now is whether that was the entire adjustment into the decision, or just the beginning of a a stock market driven by the bond market.

This Week’s Expected Moves:

• SPX/SPY: 1.2% (6500-6675)

  • QQQ: 1.5%

  • IWM: 2.4%

  • TLT: 1.3%

  • USO: 2.7%

IWM is also interesting as its the last of the major indices to now be threatening prior highs. A breakout in small caps could open the overall market up for some euphoric action.

This week’s calendar is headlined by Fed on Wednesday but we also see a new retail sales number as well as regional manufacturing, and an initial jobless claims number that was a big surprise to the upside last week.

Economic Calendar: (consensus)

• Monday

  • 8:30am - NY Manufacturing (3)

• Tuesday

  • 8:30am - Retail Sales (0.3%)

• Wednesday

  • 8:30am - Housing Starts (1.38m)

  • 2pm - Fed Rate Decision

  • 2:30pm - Powell Presser

• Thursday

  • 8:30am - Initial Jobless Claims (240k)

  • 8:30 - Philly Manufacturing (3)

We’re likely to see implied vols rise a bit into the FOMC, but as of now there is very little fear in the market and arguably the monthly jobs numbers, and weekly jobless claims are becoming the biggest drivers of bond and equity volatility.

As far as earnings we’re getting into part of the calendar where not much will be market moving. FedEx, after hours on Thursday, is the highlight this week:

Earnings (with expected moves):

• Monday

  • After-hours: PLAY 15%

• Wednesday

  • Pre-market: GIS 4.5%

  • After-hours: CBRL 8%

• Thursday

  • Pre-market: DRI 5%, FDS 4.5%

  • After-hours: FDX 7.5%, LEN 6%

One last point: with the SPX finally breaking above 6500, we’re starting to see early signs of potential euphoria in names beyond the Mag7. If IWM breaks out above prior highs that could add even more fuel to the fire. In that scenario, we may see rising volatility alongside rising equities, as retail traders chase upside calls and spark gamma squeezes higher.

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