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Jacob: What the Fed is watching. What you need to watch. Let's get to the news first. 25 basis points interest rate cut from the Federal Reserve on Wednesday. Jerome Powell said, literally said the phrase data dependent, he will be data dependent going forward. That's the important part. We're going to get to that in a minute. On the rate cut, 10 year treasury fell, three month treasury fell. So the inversion, the gap between both yields stayed basically the same, stocks were lower to start Thursday. Stock investors not enthused basically. Now you have a divergence of opinion on the Federal Reserve. You have some Federal Reserve members, saying, we actually don't think there should be another rate cut in 2019. Some think there should be Jay Powell seems to lean towards the camp of we need one more rate cut in 2019. What do you do? Follow Powell. He gave you a pretty good roadmap. He said we are going to be data dependent. So what do you do? You follow the data, you follow inflation. But beyond that, what's the big X for x factor out there? Follow the tariff war. Ultimately the tariff war is expected to be and pretty much has been disinflationary because it's a drag on the economy. So if you watch the trade war, you watch inflation, see what inflation does. That should ultimately guide you to where rates will go. Less likelihood now than a few weeks ago that we get a second rate cut. But if the trade war rages on, which it still could. Even though, there's going to be a meeting in October. You could see another rate cut. So watch those things and watch your portfolio.

Everyone has been saying it's the forward looking statements from the Federal Reserve that matters, rather than the one rate cut the market knew it was getting. 

Well, how does anyone asses what that forward looking picture will turn out to be? 

Let's get to the news first. 

The News

The Federal Reserve cut the federal funds rate by 25 basis points Wednesday. The 10 year treasury yield dropped to 1.76%, with the 3 month yield fell to 1.92%. While still inverted, the spread between the two was little changed. 

But Fed Chairman Jerome Powell, while indicating he is personally inclined to cut rates a second time, showed some deference to his colleagues on the Federal Reserve Open Market Committee, some of whom are not inclined at all to cut rates again in 2019. 

The S&P 500, while finishing Wednesday with a marginal gain, initially fell Thursday after Jerome Powell presented a murky picture of the Fed's next steps. The index then rose on other positive factors. It's become increasingly clear that a second rate cut for 2019 is not a shoo-in. The probability of a rate cut in late October is currently at 55%, according to CME Group data. 

What to Watch

Watch inflation and economic data, and beyond that, watch the trade war between the U.S. and China, the economy's current 'X' factor. 

Powell said the Fed will be "data dependent," meaning that, regardless of what the U.S. market does and what President Trump says on Twitter, the Federal Reserve will honor its mandate of depending on inflation indicators for interest rate decisions. Powell said the central bank will make decisions "meeting by meeting," rather than setting a predetermined course of action. 

President Trump and Chinese leader Xi Jinping are set to meet in October after having both made conciliatory comments and even marginally conciliatory tariffs decisions (China excluded U.S. soybeans and pork from its list of current tariffs). While investors are optimistic there may soon be a trade agreement, history tells us a deal is not exactly a given.

"Clearly they [the Fed] will continue to watch incoming economic data and if that deteriorates - or if the trade war intensifies - then it is likely that they will cut rates later this year, even if they are satisfied with the current level of rates at this time," said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.

The trade war has already created economic drag. While tariffs raise prices, the trade war is ultimately disinflationary. It hurts demand, which can in turn lower prices. Moreover, businesses are less certain over the future of trade and are hesitant to invest. There has been a drop in capital expenditures, which causes a drop in hiring. On net, inflation isn't exactly getting a boost. 

That's why another rate cut is still more likely to happen than not, according to CME Group. 

Premium Pick: Jim Cramer: The Sobering Dichotomy of the Trade War Is on Display

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