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Home / Business / There is a generational shift in the Fed's thinking, and here's what it means for equities

There is a generational shift in the Fed's thinking, and here's what it means for equities



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The Fed is going to change the way it responds to inflation.

It's here ̵

1; The Federal Open Market Committee meets on Tuesday for a two-day meeting expected to end with lower interest rates and Federal Reserve Chairman Jerome Powell announcing for the first time from the podium that no, President Donald Trump is not directing interest rates .

But for a moment, let's take a longer-term view, and not whether the Fed can meet expectations or whether Powell wants the tanker markets that he often does during press conferences.

Opinion : How to read between the lines of the Fed's interest rate cut

MarketWatch & # 39; s Call of the Day comes from JPMorgan & # 39; s Asian Equity Strategy Team, pointing out the Fed is changing the so-called reaction function, which internal economists believe will lead to a transition to an average inflation framework. This means that the Fed will deliberately overheat the economy if inflation has underestimated its target for some time. This is not just a Fed thing – the European Central Bank is also considering a review.

Okay, great, but what does that mean? Well, that should mean lower bond rates. Lower bond yields are not necessarily good news for equities if it means lower growth expectations. But JPMorgan says it should return on the 10-year Treasury

TMUBMUSD10Y, -0.43%

average 2%, US equities should trade an average valuation multiple of 20 times. Although we generally assume that lower returns come with more downside due to lower growth expectations than upside due to revaluation, a structural step down in returns can actually maintain a higher average valuation, "say the strategists. [19659004] definition is long-term assets – and return stocks should be useful, say the strategists.

The market

After a Monday Monday – the Dow Jones Industrial Average

DJIA, -0.25%

increased, S&P 500

SPX, -0.37%

fell – US stocks fell free.

The British Pound

GBPUSD, -0.5320%

continued to fall as a stone on concerns of a UK exit exit from the European Union.

gold

GC.1, + 0.50%

and oil

CL.1, + 0.58%

futures increased.

Europe shares

SXXP, -1.58%

disappeared while Asia

ADOW, -0.08%

completed substantially higher.

The buzz

Beyond Meat

BYND, -10.06%

was talking about markets after reporting better sales than expected, and then announced a large stock sale of 3.25 million shares (mostly from shareholders, so it will don't come much into whether you think the valuation is insane or not, good to short it – as of Monday, stocks had a borrowing cost of 135.9% and increased to 150% for new loans, according to analysis company S3 Partners.

Capital One

COF, -7.36%

could see pressure as the bank announced a massive hack of 100 million customers. Related: Everything you need to know about data breaches, but were afraid to ask

U.S. and Chinese dealers to start trade talks in Shanghai, the first time dealers have met since Trump said China will likely wait until after the US election to enter into a deal. Possibly coincidental, Huawei said sales even increased for the US blacklist.

Data released by the Department of Commerce showed the weakest increase in consumer spending in four months in June, along with a sharp inflation of only 1.4% over 12 months, well below the Fed's 2% target.

On the revenue front, pharmaceutical giant Merck

MRK, + 1.47%

beat revenue estimate, and rival Eli Lilly

LLY, -0.21%

lifted the revenue guide. After the closing, Apple

AAPL, -1.06%

reports results. Preview : It looks like 2016 again for Apple, and that's not a good thing

The chart

To understand why the Federal Reserve will cut interest rates despite a decent home economy, consider this chart. FactSet Research looked at revenue growth for S&P 500 components that reported revenue in the second quarter, breaking it out of companies that generate more than 50% of sales in the US versus those that generate more than 50% of sales outside the US.

No surprise – the revenues are hammered for those who depend on foreign money, but they keep up with companies that generate sales page.


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