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Wednesday's Market Minute: If Powell, Then...

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Wednesday's Market Minute: If Powell, Then...

The consensus in markets right now is that Jerome Powell is forced to make a 25-basis-point cut despite a string of very good U.S. economic data. With the cut will come dissenters and hawkish language; despite the existential issues with a market that is dependent on the Fed, this remains Powell's least risky option and thus the consensus view. That said, from a strictly economic perspective, it wouldn't be unreasonable for Powell to hold off on cuts and try to talk the market off the ledge. Powell’s history and his interest in keeping the Fed’s independence both from markets and politics suggests this is not as unlikely as most think, but it is still unlikely. The third alternative, that Powell goes super dovish, is probably the least expected path. With all this in mind, let's consider what the market's response to some scenarios might tell us.

Powell cuts, waxes hawkish: if stocks sell off, it’s business as usual – the Fed collar continues to replace the Fed put. If stocks rally, the S&P 500 will be back to 20x trailing earnings and scrutiny will turn towards earnings expectations for 2020, which trend lower with each day.

Powell holds: this would probably get ugly for stocks, but if it doesn’t, it would be hugely positive for equities, suggesting the market is being weaned off the Fed.

After last week’s epic Treasury sell-off on the back of hot inflation numbers and a sizeable stimulus package from Mario Draghi at the ECB, it’s very difficult to know where bonds go. If Powell cuts and bonds sell-off, it suggests the Fed is adequately supporting the economy. After bonds sold around Draghi last week, and the good data here in the U.S., the potential for such a selloff is more pronounced. If Powell holds, technically one would expect bonds to rally. If they don’t, it is the most concerning scenario, as it suggests the rally in Treasuries has been more speculative than economically sensitive, supporting worries of a bubble.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.

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Posted-In: Jerome Powell TD AmeritradeNews Global Federal Reserve Markets General Best of Benzinga

 

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