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December
03
2018

Caved
Sven Henrich

Of course Powell caved. Isn’t it obvious why?

Home sales are dropping hard. Global growth is slowing hard. Financial conditions are tightening. Stock have been dropping. Never mind all the Fed Crying or Trump expressing his displeasure.

Real rates are still negative and the Fed’s tough talk on raising rates came to a sudden halt:

Fed’s Powell, in dovish shift, says rates near neutral:

“Federal Reserve Chair Jerome Powell on Wednesday appeared to signal the U.S. central bank is nearing an end to its interest-rate hikes, saying the Fed’s policy rate is now “just below” a level that neither brakes nor boosts a healthy economy.

Stocks and interest-rate futures jumped in response. The comments were a reversal from early last month, when Powell had said rates were probably still a “long way” from a so-called neutral level and that the Fed may even go beyond that level. Those remarks sent stocks down as investors bet the Fed would need more rate hikes to prevent the economy from overheating.”

The signs were all over the place in the past 24 hours.

Tuesday:

“Fed Vice Chair Richard Clarida said Tuesday the Fed may be getting close to the point where interest rates no longer stimulate or restrict economic growth – and that a pause might be warranted at that point.”

Today before the speech:

Fed warns that a ‘particularly large’ plunge in market prices is possible if risks materialize:

“The Federal Reserve issued a cautionary note Wednesday about risks to financial stability, saying trade tensions, geopolitical uncertainty and a buildup in corporate debt among firms with weak balance sheets pose strong threats.

In what is often a boiler plate report on conditions in the banking system and corporate and business debt, the Fed instead warned of “generally elevated” asset prices that “appear high relative to their historical ranges.”

In addition, the central bank said ongoing trade tensions, which are running high between the U.S. and China, coupled with an uncertain geopolitical environment could combine with the high asset prices to provide a notable shock.

“An escalation in trade tensions, geopolitical uncertainty, or other adverse shocks could lead to a decline in investor appetite for risks in general,” the report said. “The resulting drop in asset prices might be particularly large, given that valuations appear elevated relative to historical levels.”

The drop in asset prices would make it more difficult for companies to get funding, “putting pressure on a sector where leverage is already high,” the report said”.

That’s Fed speak for “we’re covering our collective butts”.

It gets better: The Fed is now worried about corporate debt:

Fed flags concerns over corporate debt in first-ever financial stability report

“The Federal Reserve used its first-ever financial stability report to warn primarily of the dangers lurking in corporate debt, as it made the case that the banks it regulates are strongly capitalized.

The Fed said valuation pressures are generally elevated, with investors exhibiting a high tolerance for risk taking with business debt-related assets. It found that the debt owned by businesses relative to GDP is historically high, with signs of deteriorating credit standards”.

That’s rich coming from the enablers themselves:

Thats the best analogy I could come with:

And, oh, one has to admire the timing of it all.

After all stocks were once again close to breaking their 2009 bull market trend in November:

What better way to avoid all that but with a dovish turn 3 days before month end sending stocks screaming higher.

It’s almost as if this was a Bear Trap.

No, make no mistake, this was all well crafted, timed and executed.

And while the Fed turning dovish again is bullish now is it in the longer term? The Fed just warned about massive downside risks and has admitted what bears have been saying along: They can’t normalize rates, the debt lading global construct can’t handle it. And now they’re stuck and at risk of bringing about the next recession if they were to raise rates further into 2019. And at a point  with historically little ammunition to react if things turn sour. Cut rates again? QE coming back? You better believe it. Just a matter of time.

But first let’s see how far this dovish turn will take us. Jerome Powell: The Wall Streeters, until today condemned to not get Christmas bonuses this year, salute you.

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Sven Henrich is founder and the lead market strategist for NorthmanTrader. He has been a frequent contributor to CNBC and the Wall Street Journal’s MarketWatch and is well known for his diligent technical, directional and macro analysis of global equity markets.

He publishes the Daily Market Brief keeping investors and traders abreast of the latest market critical developments and outlook.

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