Fed turn that wasn't

S&P 500 didn‘t look back at Monday‘s lows, bonds were pushing higher while the dollar retreated to my 111.50 support before stabilizing. Also junk bonds had trouble extending gains in the latter half of yesterday‘s session while long-dated Treasuries retreated intraday to a more neutral (practically doji) close. While bonds hesitated, commodities and especially precious metals did well – the turn looks here as silver with gold are looking at which other central bank‘s bluff would be called the way Bank of England‘s was, forcing UK to do an about-face, and exchange fighting inflation with (allegedly temporary) unlimited money printing to support gilts and pound.

And with a lag, markets are forcing the Fed‘s hand – there has been no catalyst for yesterday‘s broad-based upswing, yet every asset class is acting as if Powell already pivoted – or paused, as it could be euphemistically called too. The Fed isn‘t yet wobbling in its determination, no shoe has dropped that would force it to reverse course. Markets are only acting as if the Fed already folded, and as I wrote yesterday, are assigning lower probability to steep hikes in Nov and Dec than was the case two weeks ago – but there hasn‘t been a crisis that would force the Fed to blink.

That crisis would of course happen abroad, not in the States – there are plenty of European banking concerns as evidence in rising CDS, sovereign yields, energy crisis, slowing manufacturing, slowing consumer demand, housing, and of course strong inflation data abroad, which the strong dollar helps to offload elsewhere. The tail risks are high – no matter the markets acting as if they were over already, as if the Fed backed off as a result – as much as markets are forward looking, that isn‘t isn‘t guaranteed to happen soon.

Could this be the start of the Q4 rally I called for yesterday to arrive rather in 5-7 sessions instead? Hard to say now as yields would have to follow lower still (think the 10-year breaking conclusively below 3.50%), and the dollar would have to make a lower low. We‘re in no man‘s land currently, and should the rally progress with similar momentum today as was the case yesterday, without any bearish divergencies such as bonds unable to rally (risk-on mode), real assets no longer amplifying the S&P 500 upswing, appear during today‘s regular session, then the bears are in a serious short-term trouble.

For now, I‘m still leaning towards the stock market advance at least stalling, and starting to form bearish divergencies – the rally of the last 36+ hrs has been excessive, broadening, and can be called a stampede. Now, it‘s up to the herd to stop, and realize that it hadn‘t run on any good reason. All it takes is Powell & co not folding immediately – it‘s my view that just as it took the markets longer to force the Fed to raise, it‘ll take a while to force the Fed to relent. The only and real question is whether that happens still this year, or only in 2023.

Again, keeping my eyes chiefly on the dollar and long-dated bonds today – risk sentiment in junk bonds should tip the bulls‘ hands among the first signs – the tone of the session would be set within 60 min after the opening bell, but those bearish divergences might get formed only in the second half of the regular session.