Goldilocks’ Final Stand Supplants the Hawks

By now, yesterday’s FOMC meeting and subsequent press conference are in the rear-view mirror.  As I’d hoped yesterday, we got it over with.  After some back and forth activity as traders tried to determine exactly how to interpret the FOMC statement, Chair Powell once again mollified them as he reverted to his familiar “Goldilocks in a Suit” posture.

To recap, the FOMC cut rates by an as-expected 25 basis points despite three dissents (two wanted no cut, the other wanted 50bp), issued a Summary of Economic Projections (aka “dot plot”) that continued to show expectations for a single cut in 2026, and after judging that

…reserve balances have declined to ample levels and will initiate purchases of shorter-term Treasury securities as needed to maintain an ample supply of reserves on an ongoing basis

the New York Fed announced changes to its standing repurchase operations that allow it to start buying T-bills to add reserves to the financial system.

I offered my initial reaction to a reporter about 15 minutes after the statement arrived, saying

The dot plot for 2026 didn’t change, and the door remains open for cuts or stasis at the upcoming meetings.  If nobody is fully happy or angry then they probably did their job.

That “not too hot, not too cold” was the first sign that Goldilocks might be entering the building.  I then wrote down these thoughts as I listened to the press conference

“Not raising” is apparently the new cutting

This was not a hawkish cut; it was a Goldilocks cut

Should the markets have been so enthused yesterday afternoon?  I suppose so, given the traders’ disposition toward taking any piece of news that can be reasonably interpreted as positive as a reason to rally.  And there were indeed some justifications even beyond the well anticipated rate move.

First, traders are justifiably disposed toward taking any sign of monetary accommodation as a positive.  As noted above, the rate cut itself was essentially priced into the market, but the T-bill purchases were not.  On balance, that can be interpreted as a very slight bit of quantitative easing.  Any time the Fed buys securities in the open market, those dollars enter the financial system.  Considering that this move was likely in response to stress in the interbank funding market, it is not an unbridled positive, but it is nonetheless an accommodative step.

Second, the 10-year yield has moved from touching 4.20% pre-meeting yesterday to 4.11% now, meaning it’s fair to say that bond investors are not overly concerned that the Fed is losing sight of inflationary pressures.  Although the spread between 2- and 10-year yields widened to over 60bp, that is still within the upper end of a trading range that has persisted for months.   If the bond folks aren’t too worried, why should stock traders be?

Yet many of us woke up to sharply lower futures thanks to poorly received results from Oracle (ORCL) after the close.  The company’s EPS beat estimates, but its third straight quarterly cash flow burn while forecasting higher capital expenditures was understandably unwelcome.  There is good reason why ORCL traded as much as -15% lower today.  We flagged these concerns as early as September 22^nd and October 6^th, and while investors might express similar worries about other companies expecting huge commitments from OpenAI and its peers, the market has certainly been expressing its unease with ORCL recently and today.

Resolute as always, however, the S&P 500 (SPX) just eked into positive territory as I was about to wrap up this piece shortly after noon EST.  This morning’s trading was a bit of a push/pull between investors who are justifiably spooked by the aforementioned fears about AI spending alongside an active rotation into the financials, materials, and health care sectors – not to mention the ongoing momentum in the Russell 2000 (RTY).  Throw in traders’ determination to see every dip as a buying opportunity, especially after those pesky overseas sellers call it a day, and once again we see a set of broad-based early losses morph into a tech-centered drop – at least for now.