The 4 Horsemen
The 4 Horsemen BY SVEN HENRICH for Northman Trader
“And I heard as it were the noise of thunder. One of the four beasts saying come and see and I saw. And behold a white horse”.
Did the Fed just cop to something very important? Are they freaked about something I’m seeing in charts? If they’re seeing what I’m seeing they should be freaked out.
Let’s start with the former: A very oddly timed dialing back of expectations by Jay Powell and Mr. Bullard today. Markets had been feverishly pricing in a 50bp rate cut for July, but found Powell suddenly wavering, just a few days after $SPX made a new all time high. Cold feet or just clever jawboning? After all, hit the full dove button when markets are in trouble, as they were at the beginning of June, see dozens of Fed speeches and a dovish Fed meeting result in a 200 handle rally on $SPX to new all time highs, and then dial back expectations just a bit.
Hey, maybe things are not so bad, after all mission accomplished. Markets out of the woods and confidence back. If that’s the jawboning mission, well played.
There’s just a few problems with that theory.
One is the obvious I’ve been pointing to but which the Fed will never admit. Things are worse than last time and the Fed is just working with extreme limited ammunition. As I’ve said before, they need to be extremely judicious with rate cuts. So better to just jawbone, dangle the rate cuts, get the desired reaction, and then dial back expectations just a little and wrap it in “confidence” that things are actually much better.
How disingenuous. Things are always better after a 200 handle rally on the S&P 500, and they are always just a bit worse after a 200 handle drop. It’s called playing markets like day traders. Every speech is used to massage market expectations and participants jump to attention like lapdogs looking for a treat.
So Jay Powell may have admitted to something he best not want to admit to publicly: The Fed has limited ammunition and is worried. Worried that they use their limited ammunition too soon and worried not having enough when a recession begins in earnest. If this is so, then markets may end up disappointed quickly. After all July is just around the corner and unless a sudden China deal brings hope back in a major way then disappointment may be the theme of the summer.
Also coming soon: Earnings and they may be a lot less cheerful than new all time highs on $SPX last Friday indicated.