The Market: Peak Powell
Disclaimer: For informational purposes only.
Please see here and here for more information about The Weight of the Evidence.
Discussion
Was FED Chair Jerome Powell able to rip SPY off the $540 retest Wednesday morning with a leak through Nick Timiraos that the decision to go 50 next Wednesday is solely up to him, and even if he doesn’t go 50 Wednesday 50 is on the table for November and December? Sure.
Was FED Chair Jerome Powell able to rip SPY even further yesterday afternoon with a leak through Nick Timiraos that the odds of a 50 next Wednesday are more appropriately priced at 50/50, not the 85/15 in favor of a 25 prior to the leak? Sure.
But make no mistake: We are at Peak Powell, as evidenced by the fact Bitcoin has made a series of lower highs, and IG CDX a series of higher lows, while SPY bounces around its $540-565 range. This is textbook corrective action.
SPY has followed a path that turned out to be a hybrid of what I outlined in the last two Week Ahead notes (see here and here). We got the decline, retest, and dovish Powell in response to the retest; but it was the retest of $540 from last Friday that prompted the dovish Powell, not the $510-520 retest I was looking for.
Peak Powell
Not only have Bitcoin and IG CDX not confirmed SPY strength, but the number of SOFR-implied cuts actually peaked Wednesday, the day Powell ripped SPY off $540.
With current 50 pricing at 43%, there is some juice left for Powell to gun SPY by officially going 50. However…
With the S&P 500 stuffed with three years of FED dovishness, trading well above any sensible calculation of fair value, with margins through the roof, and 2025 EPS expectations so far beyond reality, Powell needs to out-dove current SOFR pricing to generate a durable SPY rally from current levels. And even then, sustained upside is not guaranteed:
Powell is already at risk of driving foreign equity capital out of SPY through a weaker USD
Aggressively dovish rate cuts, such as cutting to 3% neutral by the spring, will undoubtedly underwrite an equally aggressive rotation out of MAG7 and into LAG493…which combined with a weaker USD will accelerate foreign equity capital outflows from flagging AI equity momentum
And quickly getting to 3% “neutral” with a 5-10% fiscal deficit in place would likely entail an aggressive bear steepening at the long end of the UST curve
I do not know whether Powell goes 50 or 25, but as outlined this week in the note below I think the September SEP will largely confirm SOFR pricing, and that it will take more equity market downside to get the “3% neutral by spring” cuts.
