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Discussion
If you watch the market enough, eventually you get to the point where you can ‘feel’ it. Right now you can ‘feel’ Wall Street getting ready for new SPX lows. But this ‘feel’ is also visually clear through the relationship of Bitcoin vs. SPX - BTC has decisively moved to new pullback lows while Wall Street continues to keep SPX relatively propped ahead of Powell at 2:30pm EST.
Powell
Two key pieces of FED guidance arrived this morning via Nick Timiraos. 1) Rate hikes will be discussed at the press conference; and 2) the Fed is now officially back to looking to engineer an economic slowdown as a result of the fact the deceleration in wage inflation has stalled.
Powell is a dove at heart, so he’ll discuss rate hikes in the most calming, soothing manner possible. But just the fact hikes are part of the discussion is by FED design. They’re turning the titanic toward rate hikes, and they’re introducing the concept by injecting the question into the FOMC press conference narrative. So, even if Powell bats it away, that’s not even remotely a sign that hikes are off the table. Recall, when the Fed started hiking by 75 bps/meeting in June 2022, Powell said at that June FOMC that 75s would be “unusual” - the Fed went on to hike by 75 in July, September, and November following the initial 75 in June. Don’t be fooled by Powell’s 4D chess match with financial markets.
On the slowdown front, Powell shifted from saying the Fed needed “below trend growth” to “below potential growth” at the November FOMC; I would not be surprised to see him shift back to “below trend growth” today.
Lastly - just watching how jumpy (to the downside) the market is ahead of this FOMC, it ‘feels’ as if something is coming. This doesn’t really matter to the overall hawkish message I anticipate, but I would not be surprised to see the Fed delay tapering QT. Credit spreads are tight, the RRP is running above $400 billion, and there is over $900 billion in the TGA. There is simply no reason to taper QT other than to aid Treasury’s funding of the deficit. With the Powell Fed looking to forcefully reject the notion it is playing politics this year, one of the most overt ways of doing so would be to delay tapering QT right here and now. Powell hates going against prior guidance, so I do not believe this is likely - but it would not at all surprise me given the circumstances.