Stocks have sold off for three straight sessions. And with 21 days remaining until the next interest rate decision, all eyes this week are on the Fed’s Jerome Powell, as he’s been busy, giving a speech yesterday on “stress testing,” and is set to provide two testimonies in Washington, D.C.  

As of this morning, there is a 99.7% chance that the Fed will cut interest rates in its July meeting.

In other words, it appears that the current market sell-off is probably more technical (related to price action) than it is to last week’s robust Non-Farm Payrolls.

After all, the Fed looks at several data points, and one month’s of Non-Farm Payrolls statistics shouldn’t have that much influence on their overall decision.

As for me, I’ve been trying to keep a balanced attack while studying the Fed’s actions.

(Want to see what’s under the hood? Join my Total Alpha service is to get in the game)

But with the markets “fear index,” the VIX now creeping up to 15, I’m starting to lick my chops, thinking about all the opportunities in the market at the moment.

And yes, they include opportunities around this Fed catalyst. You see, Jerome is set to move these markets again… but if you aren’t paying attention to his clues… then you’ll totally miss it.

Don’t worry though, I’ve done the breakdown for you.

 

Jerome Powell Set to Move the Markets… Again

 

If you haven’t seen any of the headlines yet… Federal Reserve Chair Jerome Powell is heading to Congress, with his semi-annual Monetary Policy Report on Wednesday and Thursday.

Now, this will be an important report… and all eyes will be on Powell… and traders will be listening for clues as to where interest rates are headed. Not only that, the Federal Open Market Committee (FOMC) will release its June meeting minutes at 2:00 PM EST later.

That said, it’s a busy week in the macro department.

Yesterday, Powell gave welcoming remarks, regarding stress testing for banks. He noted large banks have added over $800B in common equity capital, which gives them a cushion to deal with losses in case things get sour. But that’s neither here nor there, as we care about what he’ll be saying about monetary policy.

 

Could Powell Change the Market’s Mind About Rate Cuts?

 

According to the CME FedWatch Tool, the market is pricing in a 97.6% chance of a rate cut.

Right now, the market is pointing to a 97.6% chance of a 0.25% cut, and 2.4% of unchanged rates.

Now, we haven’t seen a Federal Reserve Chair go against the market if it’s indicating a 100% chance in either direction in over 25 years…

… however, we’ve still got around 3 weeks until the FOMC meeting later this month… but that doesn’t mean Powell won’t use his speeches this week to dampen the market’s view for rate cuts.

That said, I’ll be watching closely for any clues as to where rates are headed because that could uncover trading opportunities in the iShares 20+ Year Treasury Bond ETF (TLT), SPY, and QQQ.

For example, the market is still near all-time highs… and this speech could spark a selloff if the market doesn’t like what it hears from Powell.

If Powell points to a no rate cut decision in its July meeting… then look for TLT, which has been on a massive move higher, to pull back.

Right now, it’s wait and see with the Fed.

However, there will be some language clues that Powell will give, as we’ve seen before.

 

Language Clues

 

After the better-than-expected jobs report number last week, we saw the market actually pull back from all-time highs.

You see, the market is projecting a rate cut in the July meeting… and strong jobs growth doesn’t help with that argument.

Why?

Well, traders have been buying stocks in hope of a rate cut because that means money will be cheap, and it’ll be “injected” into the economy and increase corporate profits.

If Powell points to a strong jobs report and indicates the Fed will remain “patient” and look for further clues to decide whether they should cut rates… that could cause markets to crash…

… however, if he indicates the Fed will cut rates multiple times… then we could get to all-time highs. But there is a negative backdrop to this scenario. You see, if the Fed does cut rates…

… that means there is a problem with the economy. Although this news might be good over the short-term, the market might quickly realize this and we could see a steep pullback.

Right now, we’re seeing a large disconnect… bonds are going up and the market is going up, and generally, we don’t see this action too often.

 

But these speeches could potentially correct this disconnect.

 

This will be the last week he can give a clear signal to the market. Either way, we’ll know whether the Fed will cut rates or indicate its still unsure and needs to focus on the data.

However, if Powell is ambiguous with his comments and doesn’t give any specifics… then the market may interpret this as a sign that the Fed approves of the pricing-in of a 100% chance of a rate cut.

Now, there are a few other things I’ll be looking for in these speeches.

 

Banking

 

In addition to potentially moving the overall market, Powell could move big banks like JP Morgan Chase (JPM), Goldman Sachs (GS), Citigroup ( C ), and Bank of America (BAC). The Fed Chair is expected to be questioned about the Fed overseeing the U.S. banking industry.

 

Are There Risks on the Table?

 

Powell will also have to update Congress on the Fed’s assessment of risks on the table for the U.S. Now, what the Fed Chair says here will be very important.

You see, if there are increasing concerns slowing global trade growth, trade war, etc., then this uncertainty could strengthen the argument for a rate cut. That said, I’ll be waiting to see what Powell has to say about any potential headwinds for the economy.

The Fed has already stated it would step in, if necessary… and what matters right now is what the Fed sees as potential headwinds and how those risks are characterized.

Now, I’m going to be closely monitoring these meetings and looking for any potential signals for a rate cut… or no rate cut.

Powell isn’t the only person I’m going to be listening to closely this week.

Live, tomorrow at 8:30 PM EST, I’ll be interviewing Jason Bond about his newest options strategy. When I heard he went 19 for 19 in just under 2 weeks and made over $40K… I wanted to figure out what he’s cooking up.

Now, this will be a one-night-only event, and we have no plans to record this at all. Spots are filling up quickly, and there’s limited capacity, so don’t miss out!