Powell Messaging Rules

S&P 500 had a busy Monday walking back Williams and Bostic speeches, and with anticipated success judging by Nasdaq reaching new highs – I cautioned clients and readers with Sunday‘s extensive article not to trust the Friday‘s relative weakness:..

(…) I ask whether they can lastingly turn markets risk-off when the expectations for profits growth, no recession and Powell having been more dovish than bonds expected before FOMC, is still the mainstream expectation. Rate cuts would lead to heating up economy, and that is at odds with inflation moving towards 2% through 1H 2024 without red flags for remainder of 2024 as much as reasonably robust job market. I know, I know, continuing claims keep trending higher and small business employment index is down yoy.

The short-term overextension of the stock market continues even if the assumptions this is based on, would show up as contradictory – there is not enough of a progress on inflation without risk of repeating 1970s mistakes (oil prices had been a huge driver of disinflation) to justify rate cuts, no matter the productivity growth figures – the AI story while relevant for this decade, isn‘t yet there and able to deliver right now.

Both Fed speakers couldn‘t push stocks lower much – the Powell driven celebration is continuing with dents in market breadth and more or less waning rotations at worst. It was chiefly Russell 2000 that took it on the chin Friday, but the relative resilience in bonds keeps pointing to the upswing continuation – albeit in fits and starts as the air is thinning up there. There is no concerted risk-off move, and both retail and institutions look to be interested in buying into this rally.

Historically, markets tend to rally between the last rate hike and first rate cut, and we‘re still in the soft landing mainstream conviction, no more in the higher for longer period.

Did we see a risk-off catalyst earlier in the Asian or European session? BoJ with the much hyped expectations of exiting negative rates, didn‘t prove one to send markets into tailspin really. Consequently, more profitable intraday calls have been delivered intraday both yesterday and today! Likewise the housing starts coming above expectations wouldn‘t prove as one either – dips are being bought, and the only questions is how deep or lasting these dips are going to be.

More details as always in the individual chart sections.

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Let‘s move right into the charts (all courtesy of www.stockcharts.com) – today‘s full scale article contains 4 of them, featuring S&P 500, precious metals and oil.

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Rotations, more rotations, this market breadth chart says – showing how tech had been doing exceptionally well lately. Having a look at the most extended (and rightfully so) chart of late – Russell 2000 – reveals ongoing consolidation, no willingness to really sell now.

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