When Powell made those comments about not tightening for a while he unleashed the inner bull of the equity market. For Trump and his supporters, the net result has been what they have believed for some time. Whether just a coincidence or not, the equity market has staged a comeback and has finished the month with the biggest monthly rally for over three years.
We have forgotten the shutdown, the slowing trade as a result of the trade war between Trump and China, and we have forgotten data. Everything we feared this past month is irrelevant. The S&P 500 is up 8% year to date and is on track its best monthly return since October 2015.
Technology led the gains with Facebook surging up more than 10%, and GE, the once great corporate giant now a pariah, was also up by about 10%. Both released good quarterly results and now that Powell won’t be hiking for a time, analysts can now focus on earnings.
And for the stock market, there is now something that we have not seen before – Powell has linked Fed policy to supporting the stock market and more so than any Fed Chair has done previously. Simply put data does not matter, stock market gains and losses do. This link may come back to cause problems for Powell in the future. But today the champagne flowed and the traders cheered.
Powell’s comments have already sent reverberations through the secretive world of the central banker. The ECB was quick to distance and try and absolve themselves of rigging the game as the Fed appears to be doing. The ECB has not bowed to pressure in the same way Powell has with Trump.
We should not get too carried away just yet with the Powell put. The markets have now priced in an easing bias, and only an easing by the Fed will support a full-fledged advance. And this is at a time when inflation is near the Fed target and a print of 0.3% would see inflation above 2%.
Bonds have continued their rally and this is unusual in itself. The $84 bio refunding looms large next week and there will be plenty of opportunities to buy bonds over the coming months. One wonders if bonds have just been a little caught up in the party atmosphere.
As a result of the party atmosphere, the probability of a rate cut over the next 12 months has risen to over 30% and in January 2020 the probability of a rate cut is now 50% according to the Fed Futures. The Fed has also indicated that it may adjust the rate of shrinkage of its balance sheet.
If the equity market rallies too strongly, however, and providing inflation remains subdued and employment remains high then Powell may look to tighten. For the moment though, a tightening looks unlikely and especially so given Powell’s comments. For the moment, data is not relevant for the Fed but in time it will become important once again.
In Europe, Brexit is crashing the party. German retail sales have slumped at the fastest rate since 2008. Sales plummeted 4.3% in December. The slump will be of concern to the ECB and indicates a worrying sign that household spending in Germany is falling.
Equities: The S&P 500 rose 0.82%. while the Dow fell %. The fall in the Dow was due to Dow DuPont which fell 8.3%. The Vix closed at 16.61 and the Stoxx was unchanged.
Currencies: The Bloomberg Dollar Index was steady and the euro fell 0.3%.
Bonds: (as at 4.30pm). The ten-year is trading at 2.63%. The 2-year is trading at 2.46% and the 30-year is at 2.996%. The ten-year bund closed at 0.101% and the OAT closed at 0.558%.
The U.S. curve closed on the day with the following closes 2/10 at 16.9bp, 2/30 at 53.6 bp and the 10/30 closed at 36.5bp. The U.S. 5-year closed at 2.437%. The 10-year yen gilt is trading at 0.005%. The 2/5 spread is now -2.50 bp.
Commodities: WTI fell 0.3%. Gold was unchanged. while copper rose 0.38% (Nymex Feb 19 contract).
Bitcoin is trading around $3,421.
Aussie Market Today.
Bonds to be stronger on the day. Treasuries are stronger. However, expect a little profit taking on the day as we head into the weekend. With data in the U.S. tonight traders may pare their books a little and pick up the trend Monday.
The Aussie is stronger on the day due to better commodity prices and a weaker king dollar.