The Market: A Catalyst Emerges
The Market: A Catalyst Emerges
FRB Atlanta President Bostic foreshadows a hawkish Powell later this week, the likely catalyst for SPX tactical (4-8 weeks) downside.
Discussion
In yesterday’s outlook write-up I discussed how The Trader tends to see futures market moves in today’s price action in advance of my own “quantamental” process and why they are such a valuable complement to how I see and process markets. My process is heavily focused on figuring out the “why” behind a particular market move because it provides me greater confidence to either invest with or against the move than if I were to go purely on price action. But this approach means I tend to be late, which isn’t necessarily a bad thing but it can lead to getting out of ‘mental’ position, a key component to investing/trading in an aggressive manner.
So, as discussed yesterday, The Trader sees a top forming right here and now, while I’m more bullish than they are unless my process starts to fundamentally justify the type of pullback they’re looking for. But today, my process confirmed the case for a sub-SPX 4900 pullback when FRB Atlanta President Bostic penned an essay and conducted an interview with an explicit three-part message:
No rate cut until the July FOMC at the earliest
Longer-than-previously-assumed continuation of QT at the $95 B/month cap
Economic participants pose a direct upside risk to inflation
It is highly likely this guidance foreshadows a hawkish Powell later this week. That’s pullback catalyst #1. Pullback catalyst #2 is likely to be a hotter than expected CPI report next Tuesday March 12 leading the Fed to take a rate cut out of the March SEP, bringing total cuts for 2024 down to two 25 bps cuts.
The Fed knows, I know, and everyone else knows that there won’t be any cuts this year with the economy this hot. But we need to do this silly dance anyway, where the market positions for a particular set of dovish outcomes, the Fed walks it back, and so on and so forth.
If The Trader is right and markets do what they’re likely to do into May, then we could ultimately end up with 2-3 cuts, or even more, if financial conditions end up tightening significantly from here. But first things first - there will be no rate cuts without a material markets-based tightening of financial conditions.
Bostic Exhibits
Employment is starting to reaccelerate.
Economic participants are chomping at the bit for the first cut. [This always was and always will be the problem with a “soft landing” in a 5-10% of GDP fiscal deficit economy. It’s an actual fantasy.]
One cut starting in July at the earliest, followed by a pause.
Decisively hawkish QT guidance relative to fancifully dovish market expectations.
SPX Top Still Forthcoming
Despite SPOOZ flat on the day, IG CDX is sharply lower on the day and plumbing new cycle lows. This points to more upside before a tactical top in SPX is established.
