KRE, ITB Gain as Fed Cuts Rates, XLK, XLU Slide

The SPDR S&P Regional Banking ETF (KRE) moved up 0.7% after the U.S. Federal Reserve cut benchmark interest rates by 50 basis points on Wednesday. The iShares U.S. Home Construction ETF (ITB) initially surged 2.1% before closing down 0.2%, as investors bet on declining mortgage rates.

Bond ETFs showed mixed reactions to the rate cut. The iShares TIPS Bond ETF (TIP) and iShares iBoxx USD Investment Grade Corporate Bond ETF (LQD) both fell about 0.4%. In contrast, the iShares iBoxx USD High Yield Corporate Bond ETF (HYG) inched up 0.1%.

Technology and utilities ETFs were among the day’s biggest declines. The Technology Select Sector SPDR Fund (XLK) and Utilities Select Sector SPDR Fund (XLU) both fell nearly 1%.

Most ETFs ended the day in the red despite the large Fed rate cut, with volatile trading throughout the session. Bitcoin-related ETFs inched up as the cryptocurrency briefly touched $61,153, before settling 0.1% lower at $59,726.

The U.S. Federal Reserve cut interest rates by an aggressive half of a percentage point, aiming to spark a U.S. economy that’s experienced softening jobs growth and at the same time head off what some experts see is a looming recession.

The Federal Funds rate, the rate at which the central bank lends to other banks, is now 4.75% to 5%. Cutting it should trim borrowing costs for new and refinanced mortgages as well as credit card owners and other borrowers, potentially sparking economic growth.

The cut was the first in four years and followed a cycle of 11 rate increases beginning in early 2022 that were initiated to head off inflation that surged to a 40-year high.  

"Job gains have slowed," the Fed said in its commentary announcing the cuts.

Financial markets dipped across the board Wednesday as investors await what is shaping up to be the first Federal Reserve interest rate cut in four years.

The Fed will announce its decision at 2 p.m. New York time today, followed by a press conference 30 minutes later. Odds now favor a 50-basis point cut over 25-basis points, a reversal from last week's expectations, according to the CME Group Fed Watch tool.

Looking at the strength of the SPDR S&P 500 ETF Trust (SPY), riding a string of six straight up days, it is difficult to imagine how any Fed announcement, short of not moving rates, would impact equities at this point. SPY dropped 0.3% today shortly after noon.

This will be the first rate cut by the Fed since the Covid-induced economic frenzy of March 2020, and would follow a series of 11 rate hikes since March 2022 aimed at taming inflation that reached a 40-year high.

None other than the chief executive of JPMorgan Chase Jamie Dimon said the difference between a cut of 25 basis points and 50 basis points “doesn’t mean that much,” according to Yahoo Finance.

If there are any nerves being frayed leading up to this afternoon’s Fed announcement, they will likely be found among fixed income investors where the size of the cut will be most impactful. 

But, this far down the road toward a rate cut, anyone still waiting for the Fed to pull the trigger on moving down the yield curve and extending duration is either solidly tactical or just tardy.