After an ugly May, the stock market is on track for its best weekly gain since November of 2018, at least partly on the back of hope that the Federal Reserve will soon reduce interest rates to help buoy an economy being buffeted by tariff conflagrations and sluggish global growth.
However, Deutsche Bank Securities’ Torsten Sløk warns that market gauges for predicting Fed rate moves, usually estimated by using the federal-funds futures, are “almost always wrong.”
In a short research Thursday note, Sløk explained to MarketWatch that the dotted lines in the attached chart are fed-funds futures at different points in time, compared against the red line, which shows what action the Fed actually took.
Markets are pricing in expectations for at least two rate cuts in 2019, according to CME Group data.
The prospect of easier-money policies have put the Dow Jones Industrial Average DJIA, +0.71% on track to gain 3.8% this week, representing the blue-chip indexes best weekly climb since the week of Nov. 30, according to FactSet data.
To be sure, that move comes as trepidation about the U.S.’s trade relationships with Mexico and China have exacerbated worries about a weakening economic cycle taking hold across the globe. Those woes helped drive the Nasdaq Composite Index COMP, +0.53% into a bear market, defined as a drop of at least 20% from a recent peak earlier this week.
Still, the Nasdaq is on pace for a 2.2% weekly gain despite registering a 1.6% decline on Monday, while the broad-market S&P 500 index SPX, +0.61% is tracking a 3.4% weekly gain, which would also represent its best week since November.
Even as equities have found room to rally, the 10-year Treasury note TMUBMUSD10Y, +0.44% is holding at around 2.13%, which reflects expectations rate cuts.
To be sure, the Fed has adjusted its body language, with Fed Chairman Jerome Powell earlier this week signaling that the central bank may be inclined to cut rates if the economic backdrop worsens, but that isn’t a certainty, Sløk’s chart shows.