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By mid-morning I’d already been asked multiple times about whether this morning’s stellar rally is warranted and/or sustainable. Coming on the heels of a minor “sell the news” decline after Chair Powell’s post-FOMC press conference, the turnaround is quite dramatic. In light of my frequent assertion that “traders react while investors consider”, investors consider yesterday’s rate move to be quite favorable.
Heading into the number I thought that a 25-basis point cut was necessary – grudgingly — simply because Powell told us to expect a cut. Even though I remained convinced that 25bp was what they should have done, I had no choice but to respect the market after the Wall Street Journal’s resident Fed whisperer wrote an article that implied a 50bp was in the cards. The only plausible explanation for that news report was that someone – potentially Powell himself – wanted that message out there during a pre-FOMC quiet period.
So, the market got the cut that most people expected. It was interesting to see the phrase “balance of risks” appear twice in the third paragraph of the FOMC statement, hammering home the point that after years of being focused primarily on the “stable prices” portion of their dual mandate, they are now quite concerned about the “maximum employment” portion as well. Perhaps the only dose of cold water that Powell offered was his insistence that markets should only expect 25bp cuts in the near future. Though that statement might have precipitated yesterday’s “sell the news” dip after 7 straight up days for the S&P 500 (SPX), markets have already begun to ignore that message and expect roughly 90bp in cuts for the next two meetings.
Today’s rally started when investors in Asia decided that the rate cut was indeed good news. A key factor could quite possibly be that it caused the yen to weaken, taking pressure off of what is left of the “carry trade”. The Nikkei 225 closed up more than 2%, after trading about 3% higher during the session. Since then, the yen has given back the bulk of its losses versus the USD ahead of tonight’s Bank of Japan meeting. The market is not expecting a rate hike – remember, a 25bp hike at their last meeting triggered the carry trade implosion – but we need to watch the outcome nonetheless.
Once the positive tone for stocks was set, US traders resumed their strategy of chasing every rally. And so far, investors haven’t decided to contradict them.
This rally feels like a bit of a sugar rush, but the longer and further that it persists, the more lasting it seems. Quite frankly, it is easier to accuse the Fed of stoking an already adequate fire with more fuel.
Despite protestations that monetary policy is restrictive, there are few real-world examples that it is indeed the case. Stock markets at all-time highs, bond yields near multi-year lows, few if any signs of a credit crunch that is hindering borrowers, and rallies in speculative assets like crypto, all bias against that narrative. The FOMC’s Summary of Economic Projections shows median expectations for 2% Real GDP growth (the Atlanta Fed’s GDPNow estimate is 2.9% for the coming quarter) and a 4.4% Unemployment Rate for the coming two years. Heck, if the Fed is inclined to make moves to make policy more accommodative even as they project data that would imply a “soft landing”, equity investors will like that idea immensely. And they do, at least today.
Looking forward, and wondering what might upset the rosy mood, there are frankly few catalysts other than the market’s own inertia:
- We have the potential for another government shutdown by the end of the month. But — markets don’t tend to react until the shutdown is a few days old. They usually get solved before any real damage occurs.
- We of course have the election, but because it’s a tossup, not only for the Presidency but also for the House and Senate, the market hasn’t really voted one way or the other. A possible exception to that is the long end of the yield curve. Those rates have ticked higher, but it’s hard to parse out whether that is because the Fed is less committed to fighting inflation or that each Presidential candidate seems willing to offer expensive policies that they think voters want to hear. (Probably more of the former…)
- We have a few weeks until the next earnings season, so that won’t be a catalyst for a while. That will offer some clarity about whether company managements believe that the economy is slowing or growing, but of course if we come in at market highs, the bar is raised.
- Tomorrow is a quarterly “triple-witch” expiration. Those matter less now that every day is an options expiration, but monthly expirations are unique because there are significant amounts of options that expire on the open, rather than the close, along with futures expiring and an SPX rebalance. It could add volatility to tomorrow’s pre-market and open.
But in the meantime, Mr. Market got the treats that he wanted. And like any hungry sugar lover, he already wants and expects more.
Related: What the ‘Fear Gauge’ Is Telling Us About the Stock Market