I didn’t think it at the time, but the best thing I did this week was sit up in bed at 5:30am on Thursday to watch Fed Chairman Powell answer questions after the 75bp rate rise.
The market was rallying before he spoke, and I watched the market turn and accelerate to the downside after he finished speaking.
He was quite candid in the way he spoke, and it was quite clear he didn’t want the market to misinterpret the direction the Fed was heading in.
I’m reading a lot of articles at the moment about the fact that forward indicators are pointing to inflation coming off the boil rapidly over the next few months.
That may or may not be true, but it is clear that Powell isn’t watching those indicators and thinks they just give information about what is going on at the edge of a market rather than at its core.
Commentators fret that the Fed will overtighten and cause a hard landing, but as Powell said, they can always lower rates if it looks like they have gone too far, but if they under-tighten now, inflation could become ingrained.
It was an important moment in this correction, and he could have thrown the market a bone by saying they are close to easing off the pace of rate rises, but he didn’t do that.
What he doesn’t want at the moment is a spike in bonds and stocks that eases financial conditions and makes his job of chasing down inflation harder.
In today’s ‘Closing Bell’ video, I show you how equities performed after rates peaked and the yield curve inverted in previous cycles. Then you will gain an understanding that stocks won’t necessarily bottom as soon as the Fed pivots and starts cutting rates.
If they overtighten and cause a hard landing, stocks will have to price in the slump in earnings that will follow and that can lead to falling rates and falling stocks.
So we may be nearing the end of the beginning of this correction rather than approaching an inflection point.
I also look at the S&P 500, which is on the edge of snuffing out the short-term uptrend and returning to a short-, medium-, and long-term downtrend. Ouch.
Gold is also under threat as real yields rise, so I finish off today’s video by showing you where I think gold could fall to if support can’t hold.
Until next week,
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Murray Dawes,
Editor, Money Weekend
