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Editor's Note: Below is a brief excerpt from this week's edition of Market Edges, our weekly big picture Macro newsletter featuring investable insights. Click here to learn more about Market Edges.

The Big Question → Is The Fed Dovish Enough? - 04.05.2019 cowbell cartoon

"The real risk is that investors 'buy the damn dip' at some point in August and what if it's not a dip? What if the Fed needs to cut by 50 to 100 basis points just to satisfy the market?"
—CEO Keith McCullough, The Macro Show, 6/5/2019

As we explain in this week's edition of Market Edges, investors have begun pricing in the rising probability of a Fed rate cut. As a result, bond market volatility is picking up. 

These disconcerting signals were largely ignored in last week's counter-trend rally. From a Factor Exposure perspective, the biggest bounces (vs. May’s lows) were Counter TREND as well:

  1. HIGH BETA stocks led the bounce at +5.5% on the week (but are down -4.3% in the last month)
  2. SMALL CAP stocks were +4.8% on the week (but are down -4.5% in the last month)

*Mean performance of Top Quartile vs. Bottom Quartile, SP500 companies

The Big Question → Is The Fed Dovish Enough? - style factors

With a 70% probability of a July Fed Cut priced-in, what happens if the Fed doesn’t cut on time (or by enough)? We think the data hasn't yet deteriorated enough to fulfill the market's expectations at the June FOMC meeting. If the Fed isn't dovish enough, that could royally spook financial markets.

We're of the view that 2Q GDP data to be reported on July 26 and CPI data in August, coupled with our outlook for an earnings recession in 2Q/3Q and probable resulting market selloff, will provide sufficient data ammunition for a September rate cut.

As Senior Macro analyst Darius Dale explains, in discussing recent volatility in the MOVE index (see What the Media Missed below for more):

"That's a real big signal to investors that the Fed is behind the curve. So if the Fed waits until September to cut, these counter-trend bounces could really fade and dissipate. So that's the real big risk, it’s that the 2019 dot is moving and there's only one way to go once the horse leaves the barn."

Ignore the bond market's signals at your own peril.

The Big Question → Is The Fed Dovish Enough? - CoD July Rate Cut1

The Big Question → Is The Fed Dovish Enough? - market edges