Powell Questions the Need For Cuts

As I write this, we’ve made it through about half of the highly consequential data deluge that offered the potential for significant market moves.  Chair Powell’s relatively dour press conference led to some modest intraday declines, but those who bought that fleeting dip were feeling vindicated after Microsoft (MSFT) and Meta Platforms (META) earnings were released.  This morning’s Core PCE report was taken in stride; will Apple (AAPL) and Amazon (AMZN) continue the earnings party today?  And how might tomorrow’s jobs report affect the proceedings? 

By the way, it’s also the end of the third very solid month of gains in a row for major indices.  July’s roughly 3% gain for the S&P 500 (SPX) comes after a +6.15% May and +4.96% June.  The Nasdaq 100 (NDX) has been even more stellar, with this month up about 3.25% after +9.04% and +6.27% in May and June respectively.  We saw some late buying yesterday – it would not be surprising to see some window dressing – at least in some of the smaller names that have attracted recent money flow.

We concluded yesterday’s piece with the following:

From a macro viewpoint, much matters whether those cross-currents offset or reinforce each other.  If they offset, then the result will be relatively muted volatility.  If they reinforce each other, then buckle up. 

The “buckle up” comment seemed particularly appropriate when pre-market futures were climbing over 1%. Now, shortly before midday on the East Coast, major indices are only marginally higher, kept afloat only by META’s +12% pop and MSFT’s +4.5% bump.  It has been fascinating to watch the early rally fade as breadth trended slightly negative.

Yesterday’s events point to a key pair of crosscurrents that the market will need to reckon with over the coming weeks.  On one hand we have the market’s love of all things AI, along with a willingness, if not an eagerness to reward ever-increasing amounts of capital spending on related products.  On the other, we have the Powell’s intransigence about cutting rates even amidst withering criticism from the President and growing, but still modest dissent from FOMC members.  This comment from early in yesterday’s press conference set the tone:

Q. There is a lot of lean in the markets and not to mention out of the Administration for a rate cut now in September. Is that expectation unrealistic at this point?

CHAIR POWELL. So, as you know, today we decided to leave our policy rate where it’s been, which where I would characterize as modestly restrictive. Inflation is running a bit above 2 percent, as I mentioned, even excluding tariff effects. The labor market’s solid, historically low unemployment. Financial conditions are accommodative, and the economy is not — the economy is not performing as though restrictive policy were holding it back inappropriately. So, it seems to me and to almost the whole committee that the economy is not performing as a restrictive policy is holding it back inappropriately and modestly restrictive policy seems appropriate.  [Emphasis mine]

Quite frankly, this is along the lines of what we have been asserting for some time.  Clearly, the current level of short-term rates is not deterring stock market speculation, and there is no evidence that companies are having any difficulties accessing financing.  But that is not what markets wanted to hear. 

That comment triggered a bit of selling in stocks, a quick spike in VIX over 17, and a modest reassessment of the likelihood of rate cuts over the next few FOMC meetings.  As of Tuesday, CME Fed Funds futures showed a roughly 70% chance for a 25 basis point cut in September and an 85% chance for another by December, but they now only show a roughly 40% chance for September and roughly 35% for another in December.