Four Central Bankers Aren’t Enough to Sink the Market  

Many of us just finished listening to a panel discussion with the heads of the Federal Reserve, European Central Bank (ECB), Bank of England (BOE), and Bank of Japan (BOJ).  Perhaps the most surprising takeaway is that Kazuo Ueda, the BOJ Governor, has excellent comedic timing. Admittedly, a central bank confab in beautiful Sintra, Portugal is not the main stage at a comedy venue, but he managed to get several laughs in a non-native language.  That’s impressive. But the laughs were sparser when the other panelists spoke.  Markets didn’t seem to mind.

Here is a quick multiple-choice quiz.  Which of the following comments by Fed Chair Powell was the most resonant with equity traders?

1. We won’t take consecutive rate hikes off the table
2. This tightening cycle is reminiscent of the ‘70s and ‘80s
3. We see nothing that that will change the pace of balance sheet reduction
4. When asked about whether the Fed tried to get stocks down, said “we do not target” specific segments of the market

Sorry, no credit if you guessed #4.  We’ve gotten used to this.  Powell, Lagarde, and Bailey hewed mainly to their now customary inflation-fighting stances. The Europeans were a bit more strident in commenting about expansionary fiscal policies, which Powell avoids discussing, but there was a common theme about the need to squash inflation expectations. (Not so much from Ueda, who joked that monetary policy has a 25-year lag in Japan).

Yet we’ve noted multiple times that stock traders hear what they want to hear and disregard the rest, most recently after the last FOMC meeting.  It is tempting to think that the Chairman chooses his words in a way designed to assuage markets, but I don’t really think that is his intention.  I think instead that when markets are optimistic, they pick out the bullish parts of his statement — and generally the chairman tries to be somewhat balanced in his discussions.  I’ve called him “Goldilocks in a Suit” on various occasions but that isn’t meant derisively.  The point of the nickname is to remind us that he his commentary tries never to go too far in one direction or the other,

It is quite clear that optimistic thinking remains supreme within the equity markets right now. We had reason to be concerned this morning after the Wall Street Journal story about that the Biden Administration’s desire to restrict the sale of semiconductors that could be used for AI purposes to China.  Nvidia (NVDA) and AMD sold off on that news since each to indeed sell a fair number of chips to that country.  But traders saw the recent that saw that dip in tech to be yet another buying opportunity, and we see tech stocks resuming their rally.  We also see the S&P 500 (SPX) as a result trading marginally higher around noon Eastern Time

Call it what you will: trendiness — FOMO, or window dressing ahead of the end of a very positive quarter — but it it’s clear that equity markets continue to see the same sort of inertia that we wrote about earlier this month.  In this case, the market remains in motion unless acted upon by an external force.   So far, we have not had an external force substantial enough to disrupt the positive momentum, or as I prefer to call it, inertia.   Let’s see if the end of the quarter, or earnings season that begins in just three weeks, becomes that force.