Trump Reignites Fed Feud. Last week, we discussed the “tariff reprieve” that sent stocks ripping higher in the 3rd largest one-day advance on record.
“As we said last week, any good news would cause the market to rally sharply. On Wednesday, President Trump announced a 90-day pause on the full effect of new tariffs. Interestingly, the same headline sent stocks surging on Monday but was quickly deemed “fake news” by the White House. I suspect that Monday was a “leak” by the White House to test the market response, and President Trump kept that announcement handy to stave off a further decline in the markets. Whatever the reason, the markets needed the break.”
However, this week, the market was hit following a speech by Fed Chair Jerome Powell, in which he stated that the administration’s tariffs could spark “higher inflation and lower growth.” If that sounds familiar, it should. In 2021, Powell noted that inflation would be transitory as the money supply exploded by 42%. He was wrong then and is likely wrong again by fixating on hypothetical tariff shocks while ignoring the deflationary “red flags” from falling oil prices, slowing consumption, declining savings rates, and rising delinquencies.
Unsurprisingly, President Trump responded to Powell’s comments very quickly, reminiscent of the feud between the two during 2018. In a post on Truth Social, President Trump wrote:
Trump is correct in his statement. The ECB’s decision to cut rates for the seventh time was unanimous. Regardless of Powell’s reason for his position, the stress on the financial system is increasing. As we noted last week, credit spreads are rising, and there is clear evidence that the economy is weakening as consumer demand softens. The Federal Reserve remains overly concerned about missing the inflation push in 2021 by not recognizing the impact of shuttering economic production and sending checks to households. As such, the Fed will likely be late once again in identifying the deflationary pressure of tariffs on economic growth. Of course, just as in 2018, the Fed began cutting rates quickly during 2019 to stem the “repo crisis”. The Fed may be wrong again.
Technical Update
While the markets await the next Federal Reserve meeting, the uncertainty over monetary policy weighs on markets as much as the uncertainty about tariffs. This past week, the market reversed some of its gains from the massive “tariff reprieve” surge. With the MACD back on a buy signal and money flows turning positive, buyers are tepidly stepping back into the market. The 20-DMA continues to act as overhead resistance, defining the current downtrend. While there is undoubtedly a risk of another test of recent lows, which should be expected and why caution remains advisable, a break above the 20-DMA would lead to a rally to the 50-DMA. (Monday’s article will address the “Death Cross” and what it means for investors.)
As is always the case, the market prices in current events and looks forward with more optimistic expectations. While there are many media headline-driven narratives, the tariffs are now a well-known factor, and markets have priced most of the impact into current prices and valuations. Furthermore, the bond market appears to have started resolving the recent “basis trade” blow-up, with bond yields and volatility declining.
Does that mean that the market is now devoid of risk? No. But, as we will discuss further in today’s commentary, we may be closing in on a near-term market low.
Let’s focus on a primary question: Is the market close to a bottom?
Related: Is the Inflation Storm Finally Over? What the Latest Data Says