Stocks rallied yesterday as pent-up bullish energy spilled over into the markets as the Fed stuck to the rules. No rate cuts this month, but September could be THE ONE, according to Fed Head Powell.
Sour then sweet. When I was still in short pants, my mother would take me out for a day of errands. If those errands included a stop at Herr Vetter’s butcher shop, I would be in for a treat… of course, if I behaved myself. Now I know that when my kids read this, the first thing that will pop into their minds is sausage, of course. If you are brought up by Austro-Hungarian parents, sausage is a major food group. No, it wasn’t sausage, though Vetter made the finest in the state. If I behaved, I would be able to pick between 2 of the candies he had stacked in very neat, German piles, next to the neatly stacked piles of German language magazines and newspapers. I could either choose squares made of pure sugar (I am not kidding) or Goldbär, which are now affectionately known as… Gummy Bears. I was lucky to be the first one in that trade, though being the first one in Apple’s stock would probably have paid off a bit better. Anyway, I grew up on the stuff. Many, many, many years later, when my kids were young, some evil mastermind decided to dip these gummy perfections into a mixture of sugar and citric acid. Who, I ask, would want to eat something coated in sour, citric acid? Well, apparently, lots of people. My kids, even my wife, love the sensation of eating these sour treats that go from sour to sweet in an instant.
Yesterday, the Fed’s FOMC meeting was teed up to be something of a no-show. The market had already decided that the Fed was not going to change its rate policy, but was hopeful that, given recent economic releases that showed inflation moderating and the labor market softening, there might be a hint that rate cuts would be coming in September. There was a bit of tension in the markets as equity indexes (except for small caps) recently experienced a pull-back from all-time highs. The last thing anyone wanted was some sort of surprise. Here is how the afternoon unfolded.
The FOMC statement was released at 14:00 Wall Street Time. The edited statement replaced “remained strong” with “moderated” when describing job gains. “Have moved” was replaced by “continue to move,” to describe inflation. On June 12th the committee was “highly attentive to inflation risk,” but this time is “attentive to the risks to both sides of its dual mandate.” That’s pretty much it. No rate cuts and hints of future rate cuts. On the surface the statement was ever-so-slightly hawkish. But if you read into the edits, it is clear that the Fed is concerned about a softening labor market. Pro-tip: [in whispering voice] you fix that problem with rate cuts. I would say that overall, this sour policy statement was taken in stride by the markets which were already riding high in the green leading up to the release. We witnessed a slight uptick in Treasury yields across the curve, and the probability of a September rate cut (according to futures) fell a bit but stayed above 100%. But the real show was about to begin with Powell’s press conference at 14:30.
He looked tired – I get it – but he stood tall and read through his prepared statement which was in line with the policy statement, but also with a slightly bearish timbre. And then it happened, almost instantly, in the roughly 43 minutes of Q&A. The sweetness shot out of him like beams of light. Perhaps that is bit too dramatic. In his own way, Powell exuded a pretty obvious dovish tenor in his careful selection of words and intonation. The takeaway: the Fed is going to cut interest rates in September… AS LONG AS NOTHING STUPID HAPPENS IN THE INTERIM.
The markets, not surprisingly, liked that sweet taste after the sour sensation delivered by the statement. Markets closed well in the green, despite late-session pullbacks related to news of a possible escalation in the middle east. Probabilities for a September cut shot back up and bond yields melted back down. Up next in the Fed saga is the monthly jobs report which will be released tomorrow. Remember that statement about the “dual mandate?” That means the Fed will be watching tomorrows release closely. The sour gummy revolution never made it into my corner of the candy basket, and thankfully, my kids do still like the occasional good, old-fashioned gummy bears that I grew up with. Vetter’s Meat Market was a fantastic place and will continue to be a mainstay in my “good memories from childhood” bucket.
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