[Chart courtesy of MarketWatch.com]

1. Moving the markets

As the chart above shows, pumping, dumping, and pumping was the theme of the day, as traders tried to incorporate Powell’s “transitionary disinflation” in their vocabulary, while assessing if it would produce a bullish or bearish outcome.

Judging by the ramp into the close, the current picture is positive for equities, but traders and algos alike had to sort through seemingly opposing statements during his latest speech.

Here are some of the highlights:

• …disinflation has barely begun and there’s still a long way to go…
• …financial conditions have tightened.
• …more rate hikes are likely to be needed. This process is likely to take quite a bit of time…
• My guess is it will take certainly into not just this year but next year, to get to 2%.
• The reality is if we continue to get strong labor market reports or higher inflation reports, it might be the case that we have to raise rates more than is now expected.

Yet, all Wall Street heard was “disinflation,” and off to the races we went. Never mind that he did not mention any pause or pivot in his speech, and he even stretched the timing of his projected outcome into next year.

Bloomberg’s Ira Jersey viewed market reaction with a sense of reality:

“The market (could it be algos?) again seems to take the word ‘disinflation’ and give it a greater significance than it should have.

But “the caveat of ‘early’ in the process just solidifies my view that the Fed won’t be cutting this year, which is different than the market is pricing.”

I agree with his more hawkish assessment, and that today’s euphoric reaction does not sync up with reality. However, bond yields were mixed, as the US Dollar tumbled, and triggered a ‘Death Cross,” which helped Gold to inch closer to it’s $1,900 level.

The precious metal has now triggered a golden cross, which means its 50-day M/A has crossed above its 200-day M/A, a very bullish sign.

[Chart courtesy of MarketWatch.com]

1. Moving the markets

Bond yields jumped sharply with the 10-year adding some 24-basis points to end the session at 3.64%. The markets vacillated predominantly below the unchanged lines, but the major indexes managed to close off their intra-day lows. Still, rate hike expectations have exploded, as the hawkish theme remains to be the dominant one.  

Uncertainty reigned, as traders were still shaken up from Friday’s jobs report, which indicated anything but a recession. That brought into question whether the Fed is truly motivated to pause hiking rated—let alone pivot—both firmly held assumptions which formed the basis of the recent rally, the continuation of which has now become questionable.

Earnings continue to be in focus, but so far profits for S&P 500 companies are on pace to be 2.7% lower than Q4 2022, according to data provider Refinitiv. That means the tug-of-war between earnings and hawkish Fed policy continues, with all players now eagerly awaiting Powell’ speech tomorrow at the Economic Club of Washington.

The US Dollar bounced for its 3^rd straight day, helped by a jump in bond yields, while Gold held on to slight gains, an impressive performance in light of the dollar’s advance.

Trader’s will anxiously dissect Powell’s speech tomorrow for any indication that would clarify whether hawkishness will be the monetary direction for the foreseeable future. If so, the bullish crowd may have to rethink their reckless exuberance.

[Chart courtesy of MarketWatch.com]

1. Moving the markets

The Fed offered no surprise and followed the expected theme of hiking rates by only 0.25% with more to come. A mid-day sell-off reversed with traders focusing on chairman Powell’s acknowledgement of falling inflation:

We can now say for the first time that the disinflationary process has started. We can really see that, and we see it really on goods prices so far.

While that was music to the bullish crowd, Powell gave no real hint of a pause in hikes, maintaining that:

Ongoing increases in the target range will be appropriate to a attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time.

But, he appeared to shrug off the fact that financial conditions have dramatically loosened recently, as ZeroHedge pointed out, a dovish fact that surprised traders and created additional upward momentum off the mid-session bottom supported by another short squeeze.

In the end, the markets expected some hawkish tones during the presser, yet Powell did not bite but maintained a more dovish tone pushing terminal rate expectations to much lower levels. Market participants took that as a Fed in capitulation mode.

This affected bond yields, which retreated sharply, with the 10-year dropping all the way below the 3.4% level, which is its lowest point since last September. As a result, the US Dollar got spanked to its smallest since last April, while Gold shifted into overdrive by adding over 1% for the day to close at $1,967.

$2,000 gold looks to be on the horizon.