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Fed Has No Idea When It Might Be Able to Cut Rates

Published 05/02/2024, 02:26 AM
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The Fed meetings seem to create more confusion than needed, but it is what is what it is. I know that even though I wrote yesterday that at 2:35 PM ET, it was possible that we saw the usual FOMC press conference volatility crush, and that it could send stocks higher, I still get messages and questions about why the market rallied and how the market is taking Powell has “dovish” blah, blah, blah.

Amazingly, the volatility crush started on time, and the S&P 500 rallied as expected. So it wasn’t that the market thought Powell was dovish; it was just that implied volatility melted. Once the volatility crush was over, the sellers came back in and took all of the gains away.

VIX Index-5-Min Chart

The key takeaway yesterday seems to be that the Fed has no idea when it will be able to cut rates. Powell seems hopeful the policy will be tight enough to bring inflation back to target. If the market helps him and tightens financial conditions, it may be. If the market doesn’t tighten financial conditions, then policy probably isn’t tight enough.

Yesterday’s ISM prices paid index didn’t suggest that goods inflation is easing. It rose to 60.9, much higher than the estimates for 55.4. It wasn’t a surprise, and it probably suggests an uptick in m/m CPI for April.ISM and CPI Index-Monthly Data

At least at this point, the market doesn’t see the first rate cut until December, and at some point, all the sell-side analysts still looking for the cut in July or September will pivot to a later date for the rate cut.WIRP Daily Data

However, 10-year rates refused to move higher yesterday, and the case for rates to move higher will probably have to wait until the Jobs report at this point for that to happen potentially. Positioning around the FOMC meeting didn’t allow for that to happen yesterday.

US 10-Year Yield-Daily Chart

The dollar index fell yesterday after the BOJ decided to intervene in the FX market again, driving the USD/JPY sharply lower. At least they seemed to get a lot of bang for their buck this time around, waiting until 4 PM ET, when liquidity starts to thin out in the FX market.

USD/JPY-5-Min Chart

BTC/USD found some support yesterday, around 57,000. Whether that will hold, I don’t know. I think this is only a minor level of support, and the bigger level of support comes around 51,000. But we will have to see.BTC/USD-1-Hour Chart

The only reason I care about Bitcoin is that it seems to serve as a decent liquidity gauge, and in the past, it has been a decent “tell” on the direction of the NASDAQ 100. It would imply that the NASDAQ’s drop is probably not over, but we must see what happens.

BTC/USD-Daily Chart

I wouldn’t call yesterday’s drop a break of the bear flag, but it was close, and we need to follow through today. If the bear flag is broken, then the sell-off in the market should intensify, and the pace of the decline should start to pick up.SPX-15-Min Chart

Anyway, that was enough excitement for me yesterday.

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