Russell Outperforms Ahead of FOMC Minutes

Small-cap stocks have been the big winners this month as investors bet on their agility amid easing trade concerns and ahead of an expected rate cut by the Fed.

The Key Factors Behind the Move

• Russell 2000 is arguably the most sensitive to monetary policy changes, and rising expectations of a rate cut have helped it soar 8% this month.
• Earnings during Q2 handily beat expectations, suggesting the US economy remains solid.
• FOMC minutes on tap, with markets looking to see how much influence the jobs data will have on members' views to cut rates in September.

Russell Leading the Way Higher

After taking a dip at the start of the month when NFP figures disappointed, suggesting much more weakness in the US economy, US indices have recovered and are now scoring new record highs. But the , as traders expect more rate cuts. Small-cap stocks are understood to be the most sensitive to changes in monetary policy because their shares are seen as higher risk. Also, the companies are more agile in adapting to changing circumstances. The index had been lagging since the start of the year, weighed down by the Fed's decision to keep rates unchanged amid concerns that tariffs would drive up inflation.

US stocks have generally , which helped propel larger indices like the S&P 500 and Nasdaq to new all-time highs last week. With the vast majority of companies having reported, and the season unofficially coming to a close, analysts see Q2 corporate earnings rising 11.8%. This more than doubles the relatively modest 5% expectations. Companies managed to shrug off a series of concerns raised by analysts, such as tariffs, high valuations and uncertainty about the health of the US economy.

What to Expect from FOMC Minutes

Markets will still be keen to look through the minutes of the last FOMC meeting, which will be released on Wednesday. The meeting had the , a sign of the growing divisions within the Fed over how to set interest rates. At the time, the Fed highlighted a solid jobs market as a reason to keep rates unchanged, which was contradicted by corrections in the NFP figures two days later. Given that FOMC members have the opportunity to revise their remarks after the meeting, traders will likely want to see what the different members say about the job market. Given the dissenting votes and commentary from other officials since the meeting, there will be interest to see if and how much more dovish the Fed has become. Markets are pricing in . 

Russell 2000 Set To Challenge Spring Highs

The Russell 2000 is pulling off highs in the wake of CPI figures last week, which increased expectations of further easing from the Fed. With RSI above 50, it still could have further upward momentum if the FOMC minutes give the market renewed hopes for easing. To the upside, it could encounter resistance at the 2330 level, which it bounced off of last week and was the high in early spring. A break above could head toward the round 2400 resistance level. If the downward move continues, the Russell 2000 could find support at the 50-MA at 2230, which is where it was before CPI figures pushed it higher. A break below would head towards support at the August low of 2140.

Source: SpreadEx | Russell 2000