1. Roaring economic prospects just sent the U.S. stock market to its best week of the year!
2. Waning economic prospects just sent the U.S. stock market to its best week of the year!
- The market is now pricing a near-certainty (over 85%) change of a cut in July, despite the fact that only one member of the FOMC has argued cuts are necessary to support growth and push back against low inflation; that member, St. Louis Fed President James Bullard, has a history of getting carried away with market scares.
- Relative to what the market is pricing, recent FOMC communication has sounded relatively hawkish: the market is pricing multiple cuts this year, but FOMC is only gesturing at rate cuts as a vague possibility and numerous speakers continue to stress “patience” while talking up their assessment of economic activity.
- As a result, our Fedspeak Monitor Index has diverged radically from recent changes in interest rates, as shown in the chart below.
- In our view, it’s possible that the FOMC about-faces in short order, but the market is pricing much more radical declines in the policy rate with a very high degree of confidence. • It’s one thing to price an outcome as possible, and another to assume it as a done deal while also going much, much further.
- That difference—possibility from the FOMC and certainty from the market—is what’s driving the massive, unsustainable divergence between the tone of the central bank and the market pricing for what it does next.
So while absolutely the rally could continue right into Monday morning and trap more short-selling bears — forcing them to cover (further exacerbating the up move) — last week’s upswing by itself, given what inspired it, hasn’t inspired me to put new capital to work in any big way just yet.
Plus, the technicals, while improved, are a long way from signaling the all-clear:
Here’s our daily S&P 500 chart (panels 2 and 3 denote bearish divergences [red lines] in those indicators):
And here’s our weekly chart from back to the beginning of the present bull market:
Bottom line: For the time being, all we can be certain of is heightened volatility — in both directions.
Have a nice weekend!