Wall Street is eagerly waiting for the outcome of the two-day FOMC meeting of the Fed beginning Sep 17. However, if CME FedWatch is an indication of market participants’ sentiments and views, then the probability of no rate cut increased significantly in the last five days. Yet, the majority of respondents still expressed confidence in a second cut in Fed fund rate after July this week.
Is a Rate Cut Likely?
As of Sep 16, per CME FedWatch, there is around 65.2% probability of a 25 basis point cut in benchmark lending rate in September after a same magnitude of cut by the Fed in July. However, 34.2% probability is that the Fed will maintain status quo.
It is noteworthy that just a month ago, the CME FedWatch assigned zero probability of no rate cut and saw just 5.4% probability for no rate cut just a week ago. Notably, the July rate cut was the first by Fed after nearly 11 years.
Recently released strong data of the U.S. economy and spike in oil price, after a severe supply cut from Saudi Arabia following a drone attack last weekend raised concerns about the Fed’s eagerness in cutting rate the second time this year.
Arguments Against Rate Cut
Several industry researchers believe that oil price have skyrocketed 14% on Sep 16, which will result in higher gasoline prices spiraling cost-push inflation. Finally, the inflation rate move closer to Fed’s 2% target rate.
On Sep 13, the Department of Commerce reported that U.S. retail sales for the month of August increased 0.4%. Although this figure is half the 0.8% rise in July’s retail sales, it surpassed the consensus estimate 0.2% growth.
Retail sales growth rates in July and August indicate strong consumer spending in the third quarter of 2019 after it rebounded in the second. Notably, consumer spending accounts for more than 70% of the U.S. economy.
The University of Michigan’s preliminary consumer sentiment index for the month of September grew to 92 from 89.8 in August. On Sep 12, the Department of Labor reported that U.S. initial claims declined by 15,000 to its five-month low level of 204,000 for the week ended Sep 7, the lowest since April 2019.
Moreover, both United States and China are considering an interim trade deal which will at least defuse further intensification of tariff war.
Arguments in Favor of Rate Cut
Despite strong consumer spending, the U.S. manufacturing sector, which accounts for 12% of the GDP, is facing weakness due to the ongoing tariff war. Business confidence has declined resulting in lower business expenditure.
Meanwhile, global economic slowdown is the major concern of Fed. The European Central Bank recently injected stimulus like rate cut and quantitative easing to restore growth in the Eurozone economy.
China, Asia’s largest economy and the second-largest trading nation of the world is struggling due to a year-long trade tussle with the United States. China’s GDP in the second-quarter 2019 grew a slowest pace in 27 years. Industrial production in August grew slowest pace since February 2002. Retail sales in August and invest in fixed-asset in the first eight-month of 2019 fell below consensus estimates.
Slowing global economy is hurting U.S. exports, especially its manufacturing products. Furthermore, higher dollar price is making terms-of-trade against the United States. Moreover, the Fed considers oil shocks as temporary, which means inflation will remain muted in the long term.
Our Top Picks
At this stage, it will be prudent to invest in rate-sensitive sectors like real estate investment trust, utility, telecom and health care. From a huge range for stocks belonging to these sectors, we have narrowed down our search to five carrying a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The chart below shows price performance of our five picks in the past three months.
AquaVenture Holdings Ltd. WAAS provides water-as-a-service solutions in North America, the Caribbean, and South America. The company operates in two segments, Seven Seas Water and Quench. The company has expected earnings growth of 9.4% for the current year. The Zacks Consensus Estimate for the current year has improved by 2.7% over the last 60 days.
MDU Resources Group Inc. MDU is engaged in regulated energy delivery, and construction materials and services businesses in the United States. It operates through five segments: Electric, Natural Gas Distribution, Pipeline and Midstream, Construction Materials and Contracting, and Construction Services. The company has expected earnings growth of 9.4% for the current year. The Zacks Consensus Estimate for the current year has improved by 1.3% over the last 60 days.
Safehold Inc. SAFE acquires, owns, manages, finances and capitalizes ground net leases. Through its modern ground lease capital solution, it helps owners of high quality multifamily, office, industrial, hospitality and mixed-use properties in major markets throughout the United States. The company has expected earnings growth of 80.5% for the current year. The Zacks Consensus Estimate for the current year has improved by 1.8% over the last 60 days.
Industrial Logistics Properties Trust ILPT is focused on the ownership and leasing of industrial and logistics properties primarily in the United States. The company has expected earnings growth of 9.9% for the current year. The Zacks Consensus Estimate for the current year has improved by 3.5% over the last 60 days.
Chemed Corp. CHE provides hospice and palliative care services to patients through a network of physicians, registered nurses, home health aides, social workers, clergy, and volunteers in the United States. It operates through two segments, VITAS and Roto-Rooter. The company has expected earnings growth of 13.5% for the current year. The Zacks Consensus Estimate for the current year has improved by 7% over the last 60 days.
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