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ECB Cuts Key Rate, Will the Fed Follow Suit? 4 Likely Winners

Nilanjan Banerjee

Market expectations that the Federal Reserve will cut the benchmark rate have intensified after the European Central Bank (ECB) announced a cut in its key interest rate to shore up Eurozone’s economy.

The ECB has not only cut interest rate by 10 basis points to a record low of minus 0.5% but will also purchase bonds worth €20 billion every month starting November. With the restart of a quantitative easing program, the ECB has launched its strongest dose of monetary stimulus in more than three years.

Like the Eurozone economy, the American economy is being weighed down by a global economic slowdown and the ongoing U.S.-China trade dispute. In fact, there is serious threat to America’s longest stretch of economic expansion, presently in the 11th year following the great recession. Thus, the Fed will possibly follow ECB next week.  

Trade War Dampens Investor Confidence

More than a year-long tariff dispute between the United States and China has been denting investor confidence. Hiring has slowed down and there has been contraction in the U.S. manufacturing sector.

In August, the United States added 130,000 nonfarm jobs — as reported by the Labor Department — falling short of economists’ projection of 150,000 as surveyed by The Wall Street Journal. Moreover, in the past three months, there has been an average addition of 156,000 jobs each month, below the average new job addition of 190,000 since the employment picture started improving eight years ago after the last recession.  

The Institute for Supply Management’s manufacturing index slipped to 49.1 in August. Notably, the reading below 50 indicates a contraction in American manufacturing sector for the first time in three years.

Another Fed Rate Cut Highly Possible

The slowdown in the job market and the sagging manufacturing sector amid trade tensions are clearly weighing on the U.S. economy. To cushion the economy, the Fed is expected to cut the benchmark federal fund rate at its Sep 17 to 18 policy meeting. This will likely be the officials’ second rate cut following the first reduction in July since 2008. Reportedly, the market is highly optimistic about a 25-bp rate cut by the Fed.

Notably, President Donald Trump strongly recommended that the Fed should lower its benchmark rate to zero or below so that the United States can refinance its debt load. In fact, after the ECB launched its new stimulus, Trump built pressure on the Fed to cut rates.

Rate-Sensitive Stocks to Make Merry

The possibility of a Fed rate cut is likely to favor utility firms since their businesses require significant debt financing. In order to deliver gas, electricity and water, utility companies are required to build power plants and maintain massive infrastructure.

We have employed our proprietary stock screener to shortlist potential utility stocks with either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Headquartered in Hampton, NH, Unitil Corporation UTL is primarily involved in distributing natural gas and electricity. The #1 Ranked stock is likely to see earnings growth of 4% and 6.5% through 2019 and 2020, respectively.

Alliant Energy Corporation LNT, headquartered in Madison, WI, is basically an energy-services provider. The company is involved in the generation of electricity and also distributes electricity and natural gas. In 2019 and 2020, the Zacks #2 Ranked company is likely to see earnings growth of 4.2% and 7.7%, respectively.

Based in New Orleans, LA, Entergy Corporation ETR is mainly engaged in generating and distributing electricity. The company, with a Zacks Rank of 2, has posted an average positive earnings surprise of 10.8% for the past four quarters. In the next five years, the stock is likely to see earnings growth of 7%, marginally outperforming the industry’s 6.6%.

NRG Energy, Inc. NRG, headquartered in Princeton, NJ, is involved in generating electricity to serve commercial and residential customers. The stock, with a Zacks Rank of 2, is likely to see earnings growth of 58.5% and 42.5% in 2019 and 2020, respectively.

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NRG Energy, Inc. (NRG) : Free Stock Analysis Report
 
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