Forget the Fed, This Is What's Really Going to Drive the Market Now
Here's our take on the FOMC statement and Powell's presser, and what investors should be focused on going forward.
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The Fed decision was largely as expected.
1. A 25 basis-point cut.
Anything else would have been shocking.
There was one dissent to do 50 bps. Since it was Stephen Miran, and he dissented last time, that is not surprising.
That there was one dissent to do nothing was slightly more interesting, but as we’ve argued, the market will discount hawks somewhat as the FOMC is likely to look a lot different early next year.
2. The end of QT is coming.
There were plenty of signals (i.e. potential glitches) in the front end of the bond market, that everyone expected this to come and it is coming.
3. Difficult, but not impossible without BLS data.
Fed Chair Powell argued that there are plenty of things they can look at to judge the economy. As he spoke, he seemed to argue that jobs seem to be maintaining their cooling, but not alarming trajectory.
4. Powell pointed out that current policy is moderately restrictive.
He admitted that policy is somewhat restrictive, which is in line, with a moderately slowing economy (which they are seeing) and seemed slightly bullish/dovish.
We can now move past the Fed to what is really going to drive the markets:
Earnings, Especially Big Tech Earnings
Lack of breadth has been a concern again recently, but big tech has provided earnings in past quarters, that warranted that. With last month bringing in $32.4 billion of tariff revenue (the largest monthly total so far), we may start getting some mentions about tariffs. Even companies that did an excellent job preparing for tariffs, may finally see them.
I suspect the cumulative effect is too low so far to raise red flags and few companies will want to attract attention to themselves by being negative on tariffs. So I think the tariff story remains a non-event on earnings calls this quarter (while it continues to help the deficit).
Trade With China and ProSec
What will the agreement look like? Will the U.S. sell “Super Duper” chips to China? That's great, short term, for chip providers. It certainly raises some national security questions, though.
While waiting to see what the trade deal looks like (a lot of “good” news is priced in on that front) we should continue to get ProSec and ProSec headlines (not enough priced in for this complete shift in government, investment, and corporate philosophy towards production for security).
Additional Thoughts
Bonds seem to be taking the threat that too much monetary policy easing is built in more than equities are (bonds trading near their lows of the day as the presser finishes, while equities have bounced from their post FOMC lows).
The Fed, given how much has been telegraphed, is less important that what is evolving on the trade front, so we can wait to see how good the deal is. I have some doubts here.
Separately, nothing but positive headlines on the direction of production for security. I have few doubts on this.
