Unemployment at 50 year lows, S&P 500 near all time human history highs and rate cuts are all the rage. Markets were screaming rate cuts and the Fed dutifully complied, first Bullard, then Jay Powell and the largest rally of 2019 ensued. Rescued again.
Look, I was not kidding last week when I spoke of Collapse. Narratives, yields, growth, prices were dropping like flies and a Fed beholden to markets had to jawbone. With heavy oversold readings going into a barrage of Fed speakers nobody should therefore have been surprised at a rally.
I said it last weekend:
“Expect to get flooded with Fed speeches next week. Let the great Fed jawboning begin anew”.
I said it on Monday:
I said it on Tuesday before Powell spoke:
If you don’t think 13 Fed speakers in one week don’t find a way to rally this market you haven’t been paying attention the last 10 years.
— Sven Henrich (@NorthmanTrader) June 4, 2019
I won’t belabor the point here as I’ve previously outlined my thoughts on the Fed’s credibility suicide (see Game Over), but let’s please all acknowledge a self evident fact:
Markets react to the Fed more than anything else, not only for years now:
..but also in 2019:
And hence understanding the macro and the Fed in context of technicals structures is critical to trading survival in a market that is so massively driven by newsflashes, tweets and liquidity flows.
The Fed had to react. Again. But now markets have forced the Fed into a corner: Pricing in rate cuts and ever more aggressively so, the Fed can now hardly afford to disappoint markets at their June and July meetings. Markets expect super dovish language at the least for the June meeting and a rate cut at the latest at the July meeting. Anything else is a letdown.
An interesting conundrum as with each rally day the likelihood of a rate cut decreases. You really expect the Fed to cut rates at record highs? Please.
Reality is the Fed has very much limited rate cut ammunition compared to previous cycles hence they need to act judiciously with rate cuts. Don’t forget we’re still scrapping at historic lows here in terms of where rates actually are:
What’s not at historic lows is debt. Oh no Sir:
And perhaps this is the biggest mistake one can make in this environment: Assuming that the very slowdown data that is prompting the Fed to react to is only related to trade wars, rather than sign of a business cycle coming to an end, the very end Powell has stated this week he’s trying to prevent.
Yes markets are reacting to tariff threats and resolutions of the same. Take Mexico for example. Friday night President Trump announced a resolution to the self created Mexico tariff situation. One can argue how seriously markets actually took this threat in the first place. After all by Friday $SPX was 3% higher than when the tariff threat was first announced. As I outlined in Not Gonna Happen, pressure by the business community precluded an actual escalation on this front. And as a result of this announcement we may see further gains early next week, but one needs to keep a close eye on the technical picture to ascertain whether these gains would be sustainable.
After all, last week’s rally had absolutely nothing to do with fundamentals, it came because fundamentals are deteriorating and forced the Fed to rescue markets again in the form of jawboning.
Can anyone with a straight face here even claim markets would’ve rallied 5%+ in one week had it not been for the Fed? I submit one can’t. A rally yes, we were massively oversold and hit key support levels, but not a 5%+ monster short squeeze/FOMO chase.
No, be assured this was another jawboning intervention once again well timed at a critical market pivot.
Ironically, structurally speaking, this rally has accomplished something of note: It has perfectly followed a script laid out years ago, one I’ve been discussing in recent market videos:
As I always say view analogs with caution, but nevertheless there it is, a structure that had called for a decline following marginal new highs and then a bounce to lower highs. At this precise moment this structure continues to follow script. Now it may seize to follow script in the weeks ahead or it may continue to follow the structure. We will know soon and hence the next couple of weeks leading into the June Fed meeting will tell us a lot more.
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