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Stocks rallied following Jay Powell on Wednesday. Powell said nothing new, and that was the problem. Because he delivered nothing new, implied volatility dropped sharply, leading to the volatility-induced rally we have grown to see following the FOMC meeting and Powell’s speeches.
Right now, the market still sees the CPI report as indicating inflation as cooling and the Fed’s job as nearly complete. So nothing new from Powell means is a dovish response.
That means everything falls back on to the economic data that comes tomorrow and Friday. If the PCE report comes in as expected, it will give a reason for the market to rally more, and if the Jobs data comes in as expected Friday, it will provide a further reason to rally. Therefore, Powell is banking on that data coming in hotter than expected.
If it doesn’t, then it means Powell took an incredibly big gamble today, risking financial conditions easing sustainability further, which will do a lot to unwind the rate hike increases he has put in place. It is mind-blogging to say that he wants monetary policy to be restrictive and he wants rates to stay higher for longer, but then not back that up with more forceful words. He is instead giving the market room to rally further and for implied volatility to melt.
The only thing that will cause financial conditions to tighten is a hotter-than-expected PCE or hotter-than-expected job report. Outside of that, Powell has given the market the green light to do whatever it wants between now and the CPI report. If that is the case, the guy might as well start cutting rates, because easing financial conditions has the same effect. He really has put it into the hands of the data gods.
The only logical explanation to his tone today is that he knows the data already, and he doesn’t want to risk financial conditions overtightening. Otherwise, it was very odd.
I think the TIP ETF demonstrates that the most breaking above the upper side of the trading channel is a sign of real rates falling.
The dollar is also very close to breaking down now, with big support at 105.50. Once that breaks, the dollar index can drop to around 103.40.
The US 2-yr is getting very close to breaking down as well, and if that should break down below 4.25%, the next significant level goes to 4%.
S&P 500 (SPY)
So falling real yields, lower nominal yields, and a falling dollar all suggest that financial conditions will ease, and that will only act to fuel stock prices up, which could serve to push the S&P 500 to around 4,120, filling the gap.
If the PCE data comes in hot, I think it has a very good chance of being hot, given the adjustments made following the cooler-than-expected CPI report. Then, much of this rally will unwind pretty quickly because it will tell the market the Fed still has much more work to do. But right now the market still sees the CPI report as indicating inflation as cooling and the Fed’s job as nearly complete.
As I said, if PCE comes in as expected or cooler, the market has the green light to rally, at least into the CPI report. So it really comes down to the data.
Charts used with the permission of Bloomberg Finance LP. This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Past performance of an index is not an indication or guarantee of future results. It is not possible to invest directly in an index. Exposure to an asset class represented by an index may be available through investable instruments based on that index. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.