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All this discussion about whether our landing is hard or soft, combined with my wife and I needing a new mattress, has caused me to conflate the economy with bedding. And in both cases, it really doesn’t matter. If you’re tired enough, you’ll fall asleep anywhere; if you’re in a FOMO and momentum driven rally mode, you’ll buy stocks regardless of the reason. Today’s economic reports make the chances for aggressive rate cutting more remote, but that doesn’t matter today.
Who remembers the days when bad news was good and vice versa? Since the market has flipped back to pricing in at least one rate cut, if not more, at each meeting, good news is good and bad news is bad. Today’s strong July Retail Sales report, coming in at +1.0% when +0.4% was expected, along with a well-received earnings beat from Walmart (WMT, +6.5%), gave investors ample reason to reaffirm the health of the American consumer. Neither figure gives any indication that the perceived weakness in employment is giving much pause to shoppers.
Fixed income markets responded accordingly to the perceived strength, with 2-year note yields rising 14 basis points and the 10-year by 10bp. The rise in short-term rates is also reflected in lower probabilities for a 50bp cut at the September FOMC meeting. The CME’s FedWatch tool now shows a 22% probability for a 50bp cut, rather that the roughly 50% chance we saw earlier this week. This broadly coincides with the IBKR ForecastTrader showing a 25% chance that the rate will be set below 4.875% at the September meeting. To my mind, both of those likelihoods still seem high, not that equity traders seem to care.
Yesterday we expressed concern that another very crowded trade was building, even as the market quickly shook off the effects of the overcrowded carry and dispersion trades. We seemed to be pricing in an almost magical belief that we will get both a soft landing AND aggressive rate cuts. As we noted above, the likelihood of aggressive cuts is ebbing, but still hardly gone. Both the CME and ForecastTrader show greater than 50% likelihoods for a December rate below 4.625%, implying more than three cuts during the remaining three meetings. It hardly seems appropriate for Chair Powell to re-affirm that likelihood at his Jackson Hole address next week given that it would put him well ahead of the last Summary of Economic Projections just weeks before the next one is due. Remember, just two years ago he threw a big bucket of cold water on market hopes for a less restrictive rate path as the FOMC was busy raising rates.
But we recognized the reality of market sentiment in the meantime, closing with:
…in the meantime, why let those concerns get in the way of a freshly renewed FOMO-driven momentum fest?
Volatility traders certainly have little concern about the potential for a significant move in the near term. The Cboe Volatility Index (VIX) has plunged to 15.27, implying that S&P 500 (SPX) volatility will remain quiescent over the coming 30 days. This of course is despite two of the past three sessions having moves of roughly 1.5% moves (“socially acceptable volatility” strikes again), and the fact that those 30 days include both Jackson Hole and Nvidia (NVDA) earnings. No one seems to want to hedge right now, which often means that it is an opportune time to do just that.
(By the way, for those of you who haven’t seen the classic movie multiple times, today’s headline recalls scene from “The Godfather”, when Sonny Corleone, the Don’s hotheaded son, says, “it's all-out war, we go to the mattresses.”)
Related: Carried Away, Then Carried Out