The Fed gets tricked out of its treat
EDITOR'S NOTE
The Fed nailed it! Stocks are rallying! Powell pulled it off this time--oh wait, no he didn't.
Traders were apparently "baffled" (in a bullish way), according to a friend of mine, when Fed Chair Powell said in his presser yesterday that inflation will be the biggest determinant of future rate hikes.
Specifically, Powell said, "I think we would need to see a really significant move up in inflation that's persistent before we would consider raising rates to address inflation concerns." To markets, that came off as pretty dovish, since no one expects big upward inflation pressure for now. And that's how you got the S&P 500 closing at a new record high yesterday.
End of story, right? Ho, no.
Enter China.
Suddenly Chinese officials are "casting doubts about reaching a comprehensive long-term trade deal with the U.S.," according to Bloomberg's early morning headline.
My same buddy thinks this is the Chinese playing the U.S. beautifully: not only did Powell yesterday seem to rule out imminent rate hikes for now, but also more rate cuts. Suddenly the latter part of that gets more important. Because, as UBS had pointed out, "Powell...seem[ed] relatively certain about a trade deal....Expectations of better trade were part of this."
Well, if the "better trade" part is now out, markets quickly look a lot more vulnerable--just after Powell ruled out more cuts! Pretty savvy way for the Chinese to suddenly gain the upper hand in trade talks over a U.S. president who watches the stock market pretty closely and has to worry about the economy as his reelection approaches, no?
And all this doesn't seem lost on President Trump, who, as the Dow dropped more than 200 points mid-morning, tweeted: "People are VERY disappointed in Jay Powell and the Federal Reserve. The Fed has called it wrong from the beginning....Others are running circles around them and laughing all the way to the bank."
Interestingly, Trump added, "China is not our problem, the Federal Reserve is!"
But it's hard not to trace this backlash (again) over the Fed's cut back to China and the trade talks. Peter Boockvar (who is joining us on the show today) fingers the weak China data lately--their manufacturing gauge fell deeper into contraction overnight and the Hong Kong GDP was terrible--as also playing a role. "With the Chinese economy continuing to slow, they also want all tariffs off before they give up much," he says.
Oh, and our own regional Chicago manufacturing gauge slumped to a four-year low this morning. Talk about rubbing salt in the wound.
More at 1 p.m! See you then...
Kelly
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