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Stocks Rally as Powell Takes Huge Gamble on Financial Conditions Easing Further

Published 12/01/2022, 03:29 AM
Updated 09/20/2023, 06:34 AM

Stocks rallied following Jay Powell on Wednesday. The Fed Chair said nothing new, and that was the problem. Because he delivered nothing new, implied volatility dropped sharply, leading to the volatility-induced rally we have grown to see following the FOMC meeting and Powell’s speeches.

Right now, the market still sees the CPI report as indicating inflation as cooling and the Fed’s job as nearly complete. So nothing new from Powell is a dovish response.

That means everything falls back on to the economic data that comes today and Friday. If the PCE report comes in as expected, it will give a reason for the market to rally more, and if the jobs data comes in as expected Friday, it will provide a further reason to rally. Therefore, Powell is banking on that data coming in hotter than expected.

If it doesn’t, then it means Powell took an incredibly big gamble yesterday, risking financial conditions easing sustainability further, which will do a lot to unwind the rate hike increases he has put in place. It is mind-blogging to say that he wants monetary policy to be restrictive and he wants rates to stay higher for longer, but then not back that up with more forceful words. He is instead giving the market room to rally further and for implied volatility to melt.

The only thing that will cause financial conditions to tighten is a hotter-than-expected PCE or hotter-than-expected job report. Outside of that, Powell has given the market the green light to do whatever it wants between now and the CPI report. If that is the case, the guy might as well start cutting rates, because easing financial conditions has the same effect. He really has put it into the hands of the data gods.

The only logical explanation to his tone yesterday is that he knows the data already, and he doesn’t want to risk financial conditions overtightening. Otherwise, it was very odd.


I think the TIP ETF demonstrates that the most, breaking above the upper side of the trading channel is a sign of real rates falling.

TIP ETF Daily Chart

US Dollar

The dollar is also very close to breaking down now, with big support at 105.50. Once that breaks, the dollar index can drop to around 103.40.

DXY Daily Chart

2-Year Treasury

The US 2-year is getting very close to breaking down as well, and if that moves below 4.25%, the next significant level goes to 4%.

US 2-Yr Yield Daily Chart

S&P 500

So falling real yields, lower nominal yields, and a falling dollar all suggest that financial conditions will ease, and that will only act to fuel stock prices up, which could serve to push the S&P 500 to around 4,120, filling the gap.

S&P 500 Index Daily Chart

If the PCE data comes in hot, I think it has a very good chance of being hot, given the adjustments made following the cooler-than-expected CPI report. Then, much of this rally will unwind pretty quickly because it will tell the market the Fed still has much more work to do. But right now the market still sees the CPI report as indicating inflation as cooling and the Fed’s job as nearly complete.

As I said, if PCE comes in as expected or cooler, the market has the green light to rally, at least into the CPI report. So it really comes down to the data.

Original Post

Latest comments

Rather than trying to understand Kramer’s mish mash and confusion just sell the VTI Jan 2023 strangle $215 Call / $190 Put for a credit of approximately $3.50 - $3.60 with a probability of better than 75% success rate. Awhile ago Mario made a lot of sense when he referenced Kramer as a good contra indicator. If asked why I follow someone who produces more than three, often contradictory articles a week, my response is comic entertainment 😄😁😇!
One of these days you will be right. Just not anytime soon.
...and wrong again...i hope you invest allways against your charts
Think you could do better as chair? lol Kramer your ego and arrogance is off the charts. Its ok to admit you were wrong sometimes. For a trader, even if the analysis is good anf jump the gun early and you get stopped out or you go in a big drawdown ... then my friend YOU MADE A WRONG CALL.
"The only logical explanation to his tone yesterday is that he knows the data already" - that's the point, Michael. Powell knows that NFP tomorrow will be <200k or around this number. Yesterday's ADP Nonfarm employment went already down. Although this statistic is tricky and not always robust, it's useful to see a trend change. Where we need to be flexible in mind is how far the actual value will differentiate from the expected! I would be cautious with new SP50 longs, as Dollar is oversold and Europe is economically weak.
Since yesterday, after Powell's speech, the US treasury yield curve between 3 Months and 2 years inverted. 3 month yielding more than 2 years and 10 years.  What do you think about?
Think that unemployment will crash a lot faster than inflation and then... hello Stagflation
Michael...yes a disappointment from JP...not backing up a dollar when commodities spiking and inflation could prove him wrong at worst possible moment
Lesson from this article is that we should all be flexible. Holding tight onto being a bear or a bull sounds like a sure way to empty one’s account
"Mind-blogging", lulz! 🤣
Ok short now since u sound like market goes up
you were again wrong, bottom to top
? This is a thoughtful article. Not banal. Worth the reading time.
lol no its not. if you follow his advice to short on 3600 your account be wiped out by now.
Sometimes Jay Powell is Mr. Grinch and sometimes Santa Claus, and it's impossible to forecast what he will be!!! Even himself doesn't know... Happy Christmas you guys, including Jay and his pals!!!
More like Dr. Jekyll and Mr. Hyde!
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