Image Source: Unsplash

It wasn’t an inspiring day. There was a lot of back-and-forth trading, followed by a late surge on news that the Trump team plans to rescind the Biden-era AI diffusion rule and replace it with something better. I’m not exactly sure what that means or what it will look like, but it’s probably no coincidence this news came today, as the public comment period on Section 232 for semiconductors ends today. Maybe “something better” means tariffs—I’m not sure.

The S&P 500 ended the day up about 43 basis points. There’s little to take away from today’s price action, except that the market seems more anxious than ever and is clinging to every Trump headline.

Liquidity conditions certainly haven’t improved much, but they were pretty bad initially. The top of the book remains below where it was before Liberation Day and below the levels seen at the end of last year. Unfortunately, it doesn’t take much to move the market these days, and that’s precisely what we’ve been witnessing.

“Uncertainty” was the word of the day at Powell’s press conference. He did his best to avoid answering any questions about the path of monetary policy, other than to emphasize that conditions remain highly uncertain. July Fed Funds futures are now trading at 4.265%, suggesting that the odds of a rate cut in July are below 50%.

Meanwhile, the 10-year yield dipped about three basis points to 4.27% on the Fed news. I’m not sure what happens next, but I still believe the bias is for rates to move higher. What does seem clear is that this consolidation phase appears to be nearing its end, potentially by May 15, based on the wedge pattern.

The dollar index rebounded somewhat today, but my guess is that the dollar still has further to weaken. The fact that rates haven’t fallen while the dollar remains weak suggests a market pricing in stagflation. Equities are the only part of the market that has yet to catch on to this.

Analysts expect both core and headline CPI to rise by 0.3% in April, while retail sales are projected to increase by just 0.1%. Next week could be critical for the stagflation narrative, especially if initial and continuing jobless claims are higher than expected tomorrow.

More By This Author: