Fed in No Rush to Cut Rates: Rocky Road Ahead for Stocks?
Michael Kramer | Feb 01, 2024 08:38
It was a rough day for stocks, with the S&P 500 dropping by 1.5% the following day before yesterday’s earnings and Powell crushing the market’s hope for a rate cut in March.
Powell sounds like he is in no rush to cut rates, and why should he? The economy grew by around 4% in the second half of 2023, the unemployment rate is sub-4 %, and inflation isn’t back to target yet.
From his point of view, there is no need to rush and take action at this point, and besides, the market has cut rates for him, with one of the aggressive easing of financial conditions since the financial crisis and pandemic.
So, if the market wants to ease financial conditions, and monetary policy works through financial conditions, the market has done the work, why do anything?
I would guess that if the market wants Powell to cut rates, it will need to give him a reason to cut.
At the very least, it could start to tighten financial conditions and make the Fed fear policy becoming too tight.
But hey, as long as the market will take the reins from Powell, he can be on cruise control and as patient as he wants.
Maybe the market is figuring it out because the CDX High Yield spread may have broken out to the upside of the triangle pattern as the RSI breaks higher, suggesting “bullish” momentum for wider spreads.
The 2:35 PM ET Vol crush came on schedule yesterday with that big surge in the SPX and a big drop in the VIX index.
But once the implied volatility reset occurred, it was back to selling, and the selling picked up when Powell said a March rate cut was not likely.
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We also saw the implied correlation index for 1,3,9, and 12 months all rise yesterday.
These will be important to watch over the next couple of days, and I think after we pass the next batch of Mag7 earnings today after the close, we should see the index move higher as the short-volatility dispersion trade comes under some further pressure.
As discussed multiple times, implied volatility levels fall sharply when companies report results and as event risk passes. This is exactly what happened yesterday after yesterday’s earnings, and the IV of the S&P 500 rose.
At least, as of this moment, things seem to be going as expected; now, I just have to see it continue to eventually see a return to much lower levels for the S&P 500 over the next several weeks.
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