The resilience of 50bp cutting odds yesterday didn‘t send the Yen rising

Powell delivered 50bp as I predicted he would – those trial balloons were not ordinary. Also the „no one left to sell to“ reaction to the bullish (bullish as it is inflating asset prices) reaction arrived iduring the conference.

Bonds declined as predicted, and the strong reaction in commodities (except oil) confirms the above take as much as Russell 2000 performance – it‘s that silver outperformed gold – now as the dust is settling.

So, what led me to the successful prediction, how did I arrive at such a conclusion for clients yesterday well before the opening bell? Quoting the article‘s premium part:

(…)  There is upswing rejection with mixed sectoral leadership picture, but I take markets being prepped for 50bp cut quite at last minute seriously – Timiraos with Dudley, and then there is Williams and Goolsbee that had already been pushing for a Jul rate cut (yes, I called it a policy mistake not to cut then). Now, they sound like trying to get ahead of the curve (market craving more cuts) byt starting the easing cycle with 50bp, and I consider yesterday‘s statements as tests of whether 50bp wouldn‘t spook markets anymore.

Yes, it looks like it would nt, and that fostered even greater put to call ratio complacency yesterday, making me consider at least an intraday setback as likely – and it would be steeper than the one called yesterday.

The resilience of 50bp cutting odds yesterday didn‘t send the yen rising, which is the key factor (yen carry trade unwind in progress) that would discourage the Fed from decreasing the yields differential – it isn‘t happening, so even if I lean towards Powell not making a cautious starting 25bp cut only (which doesn‘t „admit“ convey failure to cut earlier), but to take the risk of 50bp cut (listening to the calls to cut by this much) as it is too great to simply ignore.

It all illustrates extreme uncertainty of the moment. Yes, I lean towards Powell trying to solve the conundrum via dovish conference and dot plot if he doesn‘t deliver on the 50bp – and thanks to the excessively bullish positioning supported by job market weakness, I favor the „there is no one left to sell to“ reaction (25bp would make interest rate and income plays being hit, and it also increases general uncertainty about future cuts vs. if it were done now to make up for lost Jul).

Being ready for him delivering on 50bp would only accentuate the reaction of „sell the news“, because most are positioned for that outcome precisely.

See also bonds already declining premarket, which only adds to the mechanics described above – and the necessity of 50bp cut positioning actually, and room for disappointment.