Weekly Newsletter: FOMC Statement 101, Auto Trading System + Trading Levels for August 5th

Cannon Futures Weekly Letter Issue # 1203

• Important Notices – Light Week Ahead
• Futures 101 – FOMC 101
• Hot Market of the Week – September 30 yr bonds
• Broker’s Trading System of the Week – Mini SP Day Trading System
• Trading Levels for Next Week
• Trading Reports for Next Week

Important Notices – Next Week Highlights:

• • After a busy calendar week that included an FOMC meeting, the monthly Non-farm payrolls report for July from the U.S. Labor Department and quarterly earnings reports from Mega-cap companies Microsoft, Meta (Facebook parent), Apple and Amazon, next week will see no first-string economic or earnings reports. With that said, this week’s turbulent market movement in stock index futures, precious metals and energies all making 2+, 3+ and even 4+ percent moves both up and down – including in both directions in within a single trade day – don’t expect next week’s price action to abate. With traders now looking out to the following week’s Producer & Consumer Price Index reports for more evidence the Fed is prepared to lower borrowing costs for the first time in months, as well as Retail Sales numbers, we expect stock index futures to stay unsettled. And with tensions escalating in the Middle East after three separate assassinations of figures taking part in the hostilities, energy and precious metals futures look to be equally on edge. This sets the stage for a potentially very active week for major commodities sectors.

• Futures 101: Key Elements of the Federal Reserve Statement

  The Federal Reserve released a significant policy statement on Wednesday, July 31, 2024, following its latest policy meeting. The statement provides an overview of the current economic conditions and outlines the Federal Reserve’s decisions and future considerations regarding monetary policy. In this analysis, we will dissect the key elements of the statement, examine the Federal Reserve’s stance on interest rates, and assess the potential for lower interest rates in the coming months.

  Economic Activity and Labor Market

  The statement begins by noting that recent indicators suggest economic activity has continued to expand at a solid pace. This is a positive sign, indicating that the economy is growing steadily. However, the statement also mentions that job gains have moderated, and the unemployment rate has moved up but remains low. This suggests that while the economy is growing, the labor market is experiencing some softening.

  The moderation in job gains and the slight increase in the unemployment rate could be indicative of a maturing economic expansion. It is not uncommon for job growth to slow down as an economy reaches its full employment level. The fact that the unemployment rate remains low, despite its recent uptick, suggests that the labor market is still relatively strong.

  Inflation

  Inflation is a critical factor in the Federal Reserve’s policy decisions. The statement highlights that inflation has eased over the past year but remains somewhat elevated. There has been further progress toward the Committee’s 2 percent inflation objective in recent months. This indicates that the Federal Reserve’s efforts to control inflation are having some effect, but inflation is still above the target level.

  The Committee’s goal is to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The statement notes that the risks to achieving these goals continue to move into better balance. This suggests that the Federal Reserve sees a more balanced risk environment, which could imply a less aggressive approach to further tightening monetary policy.

  Federal Funds Rate

  In support of its goals, the Federal Reserve decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. This decision reflects a cautious approach, as the Committee evaluates the impact of previous rate hikes on the economy and inflation. The statement emphasizes that the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks when considering any adjustments to the target range for the federal funds rate.

  The Committee explicitly states that it does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent. This indicates that any rate cuts are contingent on clear evidence of sustained progress toward the inflation target.

  Balance Sheet Reduction

  The Federal Reserve will continue reducing its holdings of Treasury securities, agency debt, and agency mortgage-backed securities. This ongoing reduction of the balance sheet is part of the Federal Reserve’s broader strategy to normalize monetary policy after the extraordinary measures taken during the pandemic. By reducing its holdings, the Federal Reserve aims to tighten financial conditions and help control inflation.

  Monitoring Economic Indicators

  The statement highlights the Federal Reserve’s commitment to monitoring a wide range of economic indicators, including labor market conditions, inflation pressures, inflation expectations, and financial and international developments. This comprehensive approach ensures that the Federal Reserve remains responsive to changing economic conditions and can adjust its policy stance as needed.

  Economic Growth and Labor Market

  The moderation in job gains and the slight increase in the unemployment rate suggest that the economy is experiencing some softening. If this trend continues, it could put downward pressure on inflation, making it easier for the Federal Reserve to consider rate cuts. However, the overall solid pace of economic activity suggests that any rate cuts would be contingent on a significant slowdown in growth or a deterioration in labor market conditions.

  Financial Conditions

  The Federal Reserve’s ongoing reduction of its balance sheet is another factor to consider. By reducing its holdings of Treasury securities and other assets, the Federal Reserve is effectively tightening financial conditions. If this tightening leads to a more pronounced slowdown in economic activity or if financial conditions become too restrictive, the Federal Reserve might be more inclined to consider rate cuts to support the economy.

  Global Economic Developments

  International developments also play a crucial role in the Federal Reserve’s policy decisions. Factors such as global economic growth, trade dynamics, and geopolitical risks can influence the U.S. economy and financial markets. Any significant adverse developments on the global stage could prompt the Federal Reserve to adopt a more accommodative stance, including the possibility of rate cuts.

  Federal Reserve’s Dual Mandate

  The Federal Reserve operates under a dual mandate: to achieve maximum employment and maintain stable prices. The statement indicates that the risks to achieving these goals are moving into better balance. This suggests that the Federal Reserve is confident in its current policy stance but remains vigilant to potential risks. The emphasis on monitoring a wide range of economic indicators underscores the Federal Reserve’s commitment to being responsive to changing conditions.

  Market Expectations

  Market expectations and the Federal Reserve’s communication strategy also play a role in shaping the potential for lower interest rates. The Federal Reserve’s forward guidance and the signals it sends through its statements and speeches can influence market expectations and financial conditions. If the Federal Reserve signals a willingness to cut rates in response to deteriorating economic conditions or if market participants anticipate such a move, it could impact financial markets and the broader economy.

  The Federal Reserve’s statement on July 31, 2024, provides a comprehensive overview of the current economic conditions and the Federal Reserve’s policy stance. The decision to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent reflects a cautious approach as the Federal Reserve evaluates the impact of previous rate hikes and monitors progress toward its inflation target.

  The potential for lower interest rates in the coming months hinges on several factors, including the trajectory of inflation, economic growth, labor market conditions, financial conditions, global economic developments, and market expectations. While the Federal Reserve has indicated that it does not expect to reduce the target range until there is greater confidence that inflation is moving sustainably toward 2 percent, a significant slowdown in economic activity or adverse global developments could prompt a reassessment of this stance.

  Overall, the Federal Reserve’s commitment to achieving its dual mandate of maximum employment and stable prices means that it will remain vigilant and responsive to changing economic conditions. As such, the potential for lower interest rates cannot be ruled out entirely, but it will depend on a confluence of factors that influence the economic outlook and inflation dynamics.

  Disclaimer – Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. Past performance is not indicative of future results. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change at any time

• Hot Market of the Week – September T-Bonds

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* This is not a solicitation of any order to buy or sell, but a current market view provided by Cannon Trading Inc. Any statement of facts here in contained are derived from sources believed to be reliable, but are not guaranteed as to accuracy, nor they purport to be complete. No responsibility is assumed with respect to any such statement or with respect to any expression of opinion herein contained. Readers are urged to exercise their own judgement in trading.