I suppose the history books will read as follows: “And so it was that around lunchtime on November 28, 2018, the Powell put was born.”
To be clear, Wednesday is something of a Pyrrhic victory for Jerome Powell.
What the market witnessed today was a new Fed chair admitting that he made a rookie mistake in October. There is no ambiguity here. “Just below neutral” is a far cry from “long way from neutral” and the fact that Powell’s Wednesday remarks align with Richard Clarida’s CNBC interview is proof positive that the Fed has been mulling how to walk back Powell’s October remarks for weeks.
This is a dovish relent, although certainly not of the overt variety that we saw from, for instance, Janet Yellen in September 2015.
Powell’s explicit reference to “incoming financial data” is also notable as was his reiteration that “there is no preset policy path.”
“[He suggested] the Fed will slow its hikes or pause if financial markets freak out,” Greg Anderson, BMO’s global head of currency strategy, told Bloomberg.
It’s possible that the market is overreacting. SocGen’s Omair Sharif is sticking with his view as expressed a couple of Fridays ago following Clarida’s remarks. “Stating that the funds rate is now ‘just below’ neutral… is simply factual [and] it does not, in our view, meaningfully shift the odds that the Fed will hike to 3% before pausing”, he writes, in a quick blast, before acknowledging that the market “clearly disagrees”.
Yes, the market clearly does “disagree”. EDZ8-9 touched 25bps following Powell’s remarks, for instance.
If you look at the breakdown in 10Y yields, you can see reals falling offset by rising breakevens.
As far as the equity rally goes, the Growth—>Value shift that the market has had such a hard time digesting is going in the opposite direction, with Growth strongly outperforming in the knee-jerk to Powell’s remarks.
Meanwhile, many of the factors that have underperformed during the recent market turmoil are on top on Wednesday, underscoring the extent to which all is now “right” in the world – if only for a day.
And the sector breakdown in the S&P tells a similar story.
Again, it’s important to keep in mind that Powell’s about face on where we are in relation to neutral was necessitated by his own apparent disregard for just how critical it is that every communication with the market is carefully thought out and finely tuned.
In other words, today’s action comes courtesy of a pretty egregious mistake and if you don’t believe Powell did in fact make a mistake in October, then just know that the Fed pretty clearly does.
Whether or not this is enough to bring about a sustainable shift in rapidly deteriorating market sentiment remains to be seen. What we would note in that regard is that according to the Conference Board’s November survey, the MoM decline in the percentage of Americans who think stock prices will be higher a year from now was among the largest in history, underscoring just how much psychological damage has been done over the past 60 or so days.