Iran conflict latest: Trump says Iranian negotiators "begging" for peace deal
We saw some profit-taking on the open, but it didn’t last long.
The huge rally on the Powell policy shift on Friday is seeing some profit-taking, where most sectors are modestly in the red from both profit-taking and a lack of short covering. There are also the inevitable concerns that the Fed’s willingness to cut, while still far from their stated 2% inflation target, suggests they see a slowdown in the economy coming.
In the short term, however, lower interest rates are undeniably stimulative. The big question is, will the longer-term interest rates follow the Fed’s cuts in overnight Fed Funds?
Today, interest rates have rebounded meaningfully. The 2-year is up over 4 bps, the 10-year over 3 bps. The bets on a September Fed cut remain virtually assured at 85% and some believe that 50bps is on the table.
There is some lack of comfort that Powell’s assertion that tariffs will be mostly a one-time increase in prices will be how things actually play out. The angle seems to be that a weakening job market will restrain the ability to increase consumer prices. The problem with that is without passing through tariff costs to the consumer, it will have to be absorbed in business margins, perhaps on slower sales.
Part of Powell’s rationalization may be that, clearly, Trump wants a more dovish Fed, and staying with a more restrictive stance, with progress to 2% inflation unlikely, transitioning to a less restrictive Fed over the next 6 months is preferable to a rapid drop when Powell is replaced. If this is true, then Trump’s pressure to cut is working.
The market’s sentiments are reflected in the VIX, which dropped hard during the big rally on Friday to the low 14’s then rose premarket above 15 and has gone back to falling to mid-14s since the open, still higher than Friday’s low. It’s hard to draw conclusions after such a strong turnaround in the Fed’s stance and the major relief rally so recently.
Commodities have seen a similar move, slightly lower on the open and then back into the green. Crude oil is near the high for the month at $65.70/bbl on prospects for an improved global economy and uncertainty about what will happen with Russia/Ukraine. The US dollar index was lower over the weekend but back close to 98 after the open. One sector that’s notably weaker is crypto, with Bitcoin dipping below $111K, well off the rally to $114.5K on Friday, then bouncing back above $112K when stocks started to recover.
Overall, the trend remains positive. The AI narrative remains strong, despite increasing comments about an "AI Bubble" being heard. The Magnificent 7 dipped into the open and after the first hour and a half is leading the market, up 0.6%. The NVIDIA earnings this Wednesday are critical to the AI story and will have a wide impact if it disappoints, and likely lead to new highs if guidance is stronger than expected.
