Wednesday, November 28, 2018

Underneath Today's Rally

Today's monster rally was the biggest in 8 months. Here's my take:

Virtually without exception you'll find the media's explanation to be that today's move was entirely about Fed Chair Jerome Powell stating that rates are sitting "just below" what the Fed presently deems neutral. That would be the rate consistent with present economic conditions; i.e., a fed funds rate that would stick for awhile (no further hikes in the near-term offing).

Given today's 600-point Dow move we must conclude that that's unambiguously good news, right? Well, not so fast! Seems like just the other day Mr. Powell was setting Wall Street up for a hike in December (still very much on the table, by the way) and 4 more next year. Based on today's speech I'm thinking Powell and company are  thinking a hike in December, then one, maybe two, early next year, then a potentially long pause thereafter. 

Question is, why the newfound dovishness? Answer is, the economy, here and abroad, ain't looking quite as good as it did just a few months ago. So, frankly, no, the Fed backing off on rate hikes is anything but unambiguously good economic news. 

So then, if an easier Fed isn't good news, how come the market liked it so much? Great question!

In my view, traders have indeed begun fretting over the Fed, but mostly within the context of a threatened protracted trade war. Trust me, under no circumstances can even the U.S. economy grow at anywhere near a desirable rate while supply chains the world over are getting disrupted, and consumers are getting taxed (yes, a tariff is a tax that is passed on to the consumer), in a manner only politically-motivated measures could dictate. Rising interest rates would only make matters worse.

I'm thinking traders by and large expect a trade truce to be announced before the market opens Monday, but weren't willing to begin scaling in until today's Fed speech hurdle was in the books (just in case Powell didn't blink). The fact that Powell stated the obvious (blinked) -- that a data dependent Fed can't be all that hawkish amid a potentially slowing economic backdrop -- inspired them to begin that scaling a bit more aggressively than they might otherwise have. 

Of course, if some semblance of a truce isn't had over the weekend -- if the White House moves forward with its latest threats -- today's gains are soon to be obliterated, and some. 

Odds, and this week's commentary from the President's top advisers, favor a truce...

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