Did The “Powell Put” Change Anything?

 

On Friday, I discussed the market surge on Wednesday following comments from Fed Chair Jerome Powell:

“All it took was two 10% stock market corrections in a single year and some heavy ‘browbeating’ from President Trump to reverse Jerome Powell’s hawkish stance on hiking interest rates.

On Wednesday, Powell took to the microphone to give the markets what they have been longing for – the ‘Powell Put.’ During his speech, Powell took to a different tone than seen previously and specifically when he stated that current rates are ‘just below’ the range of estimates for a ‘neutral rate.’ This is a sharply different tone than seen previously when he suggested that a ‘neutral rate was still a long way off.’

Importantly, while the market surged higher after the comments on the suggestion the Fed was close to ‘being done’ hiking rates, it also suggests the outlook for inflation and economic growth has fallen. With the Fed Funds rate running at near 2%, if the Fed now believes such is close to a ‘neutral rate,’ it would suggest that expectations of economic growth will slow in the quarters ahead from nearly 6.0% in Q2 of 2018 to roughly 2.5% in 2019.”

This weekend, Presidents Trump and Xi are going to the table to discuss trade and tariffs. While I don’t expect much to actually come from the meeting, I would expect some smiles and handshaking between the two with some positive overtones on “progress being made.” 

Regardless of the fact the outcome will have “no teeth” to it, and will ultimately wind up back in a trade dispute over “technology rights” before long, it should be enough to rally the bulls in the short-term.

However, I agree with Goldman Sachs assessment on Friday via Zerohedge:

“Goldman writes that it sees three basic scenarios for what happens after this weekend.

  • The first and in Goldman’s view most likely outcome is continuing on the current path of ‘escalation’— tariff rates rise to 25% on all imports currently under tariff, and tariffs are extended to remaining Chinese imports.
  • A close second is a ‘pause’, where existing tariffs remain in place but the two sides agree to keep talking with escalation put on hold.
  • A ‘deal’, which Goldman thinks is unlikely in the near term, would involve complete rollback of the current tariffs.

The reason why Goldman is surprisingly pessimistic on the outcome is because there has been a growing sense among US policymakers that China has benefited disproportionately from the bilateral economic relationship, effectively supporting a hard-line stance against Beijing.”

While Goldman is leaning more towards an “escalation", President Trump has staked his entire Presidential career to the stock market as a measure of his success and failure.

If President Trump was heading into the meeting this weekend with the market at record highs, I think a “hard-line” stance on China would indeed be the outcome. However, after a bruising couple of months, it is quite possible China will see an opportunity to take advantage of a beleaguered Trump to keep negotiations moving forward.

This is also particularly the case since the House was lost to the Democrats in the mid-term. This is an issue not lost on China’s leadership either. With the President in a much weaker position, and his second tax cut now “DOA, there is little likelihood of any major policy victories over the next two years. Therefore, the risk to the Trump Administration is continuing to fight a “trade war” he can’t win anyway at the risk of crippling the economy and losing the next election.

But moving to the technical picture, other than the “one day” super rally, much like we saw immediately following the elections in November, the underlying breadth and technical backdrop has not improved much. The chart below shows the Advance-Decline Percent, TRIN, TICK and McClellan Summation Index all of which have failed to show the improvement needed to establish a bottom has been put into place.

However, with that said, the market did reach extremely oversold levels during the October/November correction which provided the necessary “fuel” for a short-term rally. However, as shown below, the impending “resistance” from both the 50- and 200-dma will likely prove to be a fairly formidable obstacle for the markets to breach in the near-term.

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Disclosure: The information contained in this article should not be construed as financial or investment advice on any subject matter. Real Investment Advice is expressly disclaims all liability ...

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