There’s no pressure on Jerome Powell this week.
After all, it’s just the fate of the financial universe that hangs in the balance. All that’s on the line is a 20% YTD gain in stocks, a 10% YTD rally in credit and massively crowded positioning in rates. And the only thing that can go wrong is everything.
We jest. Clearly, the July FOMC is a high pressure situation, and we’d be remiss not to note that it was Powell’s decision to hold press conferences after each meeting. That is, he put himself in a position where the market has a chance to misinterpret his remarks every time the Fed meets. Such will be the case after this month’s pow wow.
Read more: What To Expect From The Fed At The July Meeting And Press Conference
Stocks are riding an incredible run, up more than 20% headed into Wednesday. Had Donald Trump not restarted the trade war in May, it is entirely possible that US equities would be riding a seven-month win streak.
Powell’s task will not be an easy one. Trump made it clear on Monday and Tuesday that a 25bp rate cut isn’t “enough” for the White House, and assuming the Fed does cut, there are likely to be dissents. Powell will have to explain any dissenting votes in the press conference in a way that suggests he can build consensus for more cuts during the remainder of the year should conditions warrant. Of course, dissenters will by definition have decided that conditions didn’t warrant even one cut, let alone the start of an easing cycle.
In any event, it’s worth noting that Wednesday will be a historic day. While everyone knows this intuitively, putting an actual number on it is eye-popping. It has been 3,878 days since the Fed last cut rates, and as Bespoke Investments notes, this is “the second longest streak on record behind the 4,115 days that passed between cuts in the Discount Rate back in 1954”.
(Bespoke)
Apple’s better-than-anticipated revenue guidance should help Wall Street get off on the right foot Wednesday barring some kind of overseas stumble or another errant Trump tweet, but everything hinges on what happens from 2:00 PM in Washington to 3:30 PM.
Headed in, it’s worth noting that according to Nomura’s estimates, dealers are still long gamma, helping to keep things well behaved. “Our analysis shows that dealers are currently ‘long Gamma’ across combined SPX / SPY options, with $Gamma at 80th %Ile since 2013”, Nomura’s Charlie McElligott wrote Tuesday, on the way to cautioning that “we would see that position flip to Short Gamma down at 2978, or 2974 ex the 8/2/19 expiry”.
(Nomura)
“[It’s] also worth noting that the very long positioning in crowded Nasdaq sees QQQ’s nearing a flip from current ‘Dealer Long Gamma’ positioning to the ‘Short Gamma’ flip-zone at 191.87 / 192.10 (ex 8/2/19 expiry)”, he went on to say. That’s especially germane given $Gamma is presently at extreme levels, in the 92.5%ile since 2003, Charlie adds.
As for McElligott’s famous CTA model, below are the key trend “trigger levels” for US equities.
(Nomura)
Hopefully, Powell doesn’t say anything to drive us through any key strikes/levels on the downside. At the risk of kicking a man who’s already been kicked enough, Jay’s “plain English” has an abysmal track record.
