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Not-So-Lonesome Doves.

If there was a message to be heard, it was received loud and clear.

Tuesday was the best day for US stocks since Jerome Powell figured out how to communicate with markets under the watchful eyes of Janet Yellen and Ben Bernanke in Atlanta back in January.

Tuesday’s surge was at least in part predicated on Powell being receptive to rate cuts. After all, what else can “we will act as appropriate to sustain the expansion” possibly mean under the current circumstances, right?

Well, for one thing, Powell prefaced that with “as always”, which kinda waters it down, and you should also note that the Fed chair threw in a caveat about bubbles. After noting that the Fed takes seriously the risk of consistently undershooting their inflation target, Powell cautioned that “using monetary policy to push sufficiently hard on labor markets to lift inflation could pose risks of destabilizing excesses in financial markets or elsewhere”.

Of course, he didn’t say what “sufficiently hard” means, but the point is that the conference in Chicago is all about rethinking the Fed’s monetary policy framework, with an emphasis on inflation, and right now, thanks in no small part to the trade war, rates markets are foaming at the mouth for cuts. Given that backdrop and the setting, there wasn’t much that was particularly surprising in Powell’s remarks. Sure, he could have explicitly pushed back against market pricing, but what would be the point of doing that right now? Markets (and now, Wall Street) are convinced of where this is headed and barring some kind of dramatic pronouncement on Tuesday which would have effectively served to constrain the Fed ahead of the June meeting, nothing he said was likely to materially change the market’s view that cuts are coming.

“Powell never once uttered the phrase ‘rate cut’ as it pertained to current policy or even anything close to the ‘downward policy rate adjustment may be warranted soon’ comment from St. Louis Fed President James Bullard a day earlier”, Bloomberg’s Brian Chappatta wrote of Powell’s remarks. When it comes to the Fed “closely monitoring” the trade war and international developments more generally, what exactly does anybody expect Powell to say? That they’re not paying attention? As Chappatta puts it, “isn’t it fairly obvious that central bank officials would be watching to see if there’s fallout in the data from President Donald Trump’s trade disputes?”

In any case, it is what it is – equities heard what they wanted to hear and bounced in dramatic fashion. As mentioned above, Tuesday was among the best days in recent memory. Tech rallied sharply as well, following Monday’s antitrust-probe-inspired massacre.

Banks surged (in part because Mike Mayo thinks a rate cut will make financials “party like it’s 1995” – eye-roll) and the SOX jumped, a welcome reprieve as chip stocks have been absolutely bludgeoned over the course of the latest escalations in the trade war.

The 5s30s is back out through 70bps, the widest since November 2017. There’s no shortage of commentary documenting the risks history suggests accompany a post-inversion (or “post-flat”, if you will, as not every section of the curve has inverted) steepening. Bloomberg’s Ye Xie reiterated the point on Tuesday. “Historically, the steepening of the yield curve, say 2y/10y, after an inversion is a sign to get out of the stock market because the Fed’s about to lower rates with a recession looming”, Ye notes. This time is a bit different as the 2s10s never inverted. “At the moment, the shape of the curve looks more like 1995 when the Fed lowered rates, engineered a soft landing and extended the stock bull market”, Ye goes on to say.

For their part, Goldman says (again) that they don’t “think a flatter yield curve can help much in timing recession risks, which often have increased several years after inversion.” That said, the bank reminds you that “a bull steepening from a flat yield curve could be a much more important signal [as] during bull steepening phases equity returns tend to be very negative as markets price in higher recession risks and an easing policy cycle.”


“The only exception to this was in 1995 when EPS for the S&P 500 increased by c. 40% between 1994 and 1996”, the bank adds.

Some folks described Tuesday’s bear steepening as an “interesting” development, but keep in mind what it is officials are discussing in Chicago – the whole point is to reassess the policy framework with a mind towards addressing inflation shortfalls. The risk to the “bond love affair”/”duration infatuation” is the reappearance of inflation, and there are three possible catalysts for that, one being a new approach from the Fed (e.g., a strategy that involves tolerating overshoots to “make up” for shortfalls), the second being the tariffs and the third being a possible kitchen-sink-style stimulus push from China. Anyway, you don’t want to read too much into one day, but nobody should forget that setup, as it’s potentially combustible.

For what it’s worth, Clarida pushed back a bit on the rate cut cacophony. “We can’t be handcuffed to fluctuations in markets”, he said Tuesday. “If we get the idea growth is slowing, we will act appropriately.” There was no urgency in the message.

The high yield ETF certainly liked the risk-on mood –  the vehicle enjoyed one of its four best sessions since March of 2017.

Risk sentiment was ostensibly bolstered further by Mexican officials’ upbeat tone on being able to strike some kind of deal with Trump before the tariffs kick in next week. That, even as Trump himself explicitly said he expects the tariffs will go into effect while talks are ongoing. Auto stocks rallied for a second day on the assumption that cooler heads will prevail.

Meanwhile, GOP lawmakers are pondering the possibility of trying to push through a veto-proof version of the bipartisan resolution nullifying Trump’s border emergency. Trump says that won’t happen. He’s probably right.

Trump is also probably right to assume that eventually, the Fed will cut rates in order to ensure the trade war doesn’t completely derail the economy. At that point, assuming any easing is accompanied by more days like Tuesday, the president will feel like he has more scope to push his hardline trade agenda, which is increasingly inseparable from the rest of his agenda, whether it’s immigration or national security.



3 comments on “Not-So-Lonesome Doves.

  1. Harvey Darrow Cotton

    What a beautifully written, intelligent, and prescient article, Mr. H. Kudos. The way Mr. Powell was able to FedCommunicate a dovish pivot without FedSpeaking a dovish pivot struck that perfect balance of outdoving the dovish expectations of the market without spooking doves who aren’t superdoves. The Fed will do whatever it takes to maintain asset inflation in the teeth of a wall of worries about China, Mexico, tech crunches, recession worries, or anything else that could prevent Trump’s second term or data-driven institutional independence with a poetic blend of blink and you will miss them winks, nods, smoke signals, and tics. The Fed squared the circle of Presidential incompetence, political and party corruption, donor-class instruction, and wage suppression with aplomb and without pushing buttons. I don’t know any ‘pros’, but I know they were impressed and I am now #LongBonds #LongHighYield.

  2. Cuts in the Fed Funds rates may temporarily un-invert the 3m/10y. If the announced China + Mexico tariffs take effect, the negative impact on economic indicators, profit outlooks, and investor sentiment is unlikely to be eliminated by rate cuts alone. However, investors will also know that signs of movement toward trade deals – by either side – will trigger sharp rallies. There will be three puts to watch and everyone will be trying to figure out their level: the Trump put, the Xi put, and the AMLO put. Any guesses?

  3. This is 2000’s inversely inbred first cousin redux: there were a lot of death throes spikes on the way down. Hell, look at last autumn – a few similar lol “bull” spikes which were an alchemy of Fed fiat/Powell propaganda & buyback Fluffer Boys churning the usual suspects (like Tesla, AMD, UA, FAANGMAN, etc. ad nauseum….). Bonds and oil/copper still not having it, saying “mmmm hmmmm… whatever you SAY.”

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