As widely expected, the Fed stayed put in the latest meeting and hinted at rate cuts this year. The central bank will now “closely monitor the implications of incoming information for the economic outlook.” Though the Fed acknowledged about the economic wellbeing, it addressed that “uncertainties about this outlook have increased.”
More Fed members are now foreseeing a rate cut by next year. Nine members see the possibility of up to two rate cuts in the same frame of time. With inflation expectations tapering off, we expect some policy easing this year.
Inside Economic Forecast
The Fed upgraded its forecast for 2020 real GDP growth from 1.9% in March to 2.0% but maintained the 2019 and 2021 growth forecasts at 2.1% and 1.8%, respectively. The Fed projected the longer-run growth measure of 1.9%. Unemployment was guided down to 3.6% from 3.7% for 2019, 3.7% from 3.8% for 2020 and 3.8% from 3.9% for 2021.
PCE inflation expectations were cut from 1.8% to 1.5% for 2019 and from 2.0% to 1.9% for 2020, but were kept intact at 2.0% for 2021. Federal funds rate projections for 2019 were kept maintained at 2.4% but lowered to 2.1% from 2.6% for 2020 and to 2.4% from 2.6% for 2021. Over the longer term, the rate is projected at 2.9%, same was cut to 2.5% from 2.8% projected in March.
The immediate impact should be felt in the bond market and the yield on 10-year U.S. Treasury dropped to 2.03% from 2.06% recorded the day earlier. As the policy easing move is largely expected, yield on short-term two-year bond yields fell a steeper 12 bps to 1.74%.
Against this backdrop, we highlight a few sectors that could gain/lose from Fed activity and guidance.
Gold Miner – AngloGold Ashanti Limited AU – Up 2% on Jun 19
If rates dive, the greenback loses strength and gold starts gaining. Gold bullion ETF SPDR Gold Shares GLD was up 0.6% on Jun 19. Gold mining also stocks surged as these act as a leveraged play of the underlying asset. AngloGold Ashanti Limited has a Zacks Rank #1 (Strong Buy).
Utilities – Black Hills Corporation BKH – Up 1.7%
This sector performs well in a low-rate environment and serves better if investing sentiments are a bit edgy.
Black Hills Corporation is an energy company that generates wholesale electricity and produces natural gas, crude oil and coal. The stock has a Zacks Rank #2 (Buy) and yields 2.58% annually.
Real-Estate – NexPoint Residential Trust Inc. NXRT – Up 0.5%
This is another sector investors can lay a wager on. This high-yielding sector performs well in a low-rate environment.
The company is engaged in acquiring, owning, operating and selectively developing multifamily properties. It operates primarily in Southeastern United States and Texas. It yields 2.74% annually.
Financials – American River Bankshares AMRB – Down 1.5%
Sectors that flourish in a rising rate environment skid post the Fed meeting.
AMRB is one of them. American River Bankshares is the parent company of American River Bank, a regional bank in Northern California. It has a Zacks Rank #5 (Strong Sell).
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Black Hills Corporation (BKH) : Free Stock Analysis Report
American River Bankshares (AMRB) : Free Stock Analysis Report
SPDR Gold Shares (GLD): ETF Research Reports
AngloGold Ashanti Limited (AU) : Free Stock Analysis Report
NexPoint Residential Trust, Inc. (NXRT) : Free Stock Analysis Report
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