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New spin on the old Fed put

Posted May 10, 2024 at 9:30 am
Patrick J. O’Hare

The major indices continued their post-FOMC climb yesterday, sneaking in more gains on low volume that left the S&P 500 and Nasdaq Composite less than 1.0% away from their record closing highs.

It has been a good show, and perhaps this week’s curtain will fall with a “performance for the ages” that equates to new closing highs.

Currently, the S&P 500 futures are up 12 points and are trading 0.3% above fair value, the Nasdaq 100 futures are up 43 points and are trading 0.3% above fair value, and the Dow Jones Industrial Average futures are up 84 points and are trading 0.3% above fair value.

The early gains have been supported by mega-cap leadership, carryover momentum, and, arguably, the quest to carry on to new highs, motivated by Fed Chair Powell’s belief that the next policy move is unlikely to be a rate hike.

That’s a new spin on the old “Fed put.” The latter rested on an unspoken assurance that the Fed would step in with easier policy to forestall a market meltdown. The new version doesn’t guarantee a rate cut soon, but it has created an unspoken assurance that market participants can trade around the idea that the next monetary policy move is likely to be a rate cut.

This thinking will be put to the test early next week with the release of the April Producer Price Index on Tuesday and the April Consumer Price Index on Wednesday. It’s possible, too, that today could provide a little test of sentiment — literally and figuratively.

The preliminary University of Michigan Index of Consumer Sentiment for May will be released at 10:00 a.m. ET. Incorporated in that report are year-ahead and long run inflation expectations, which stood at 3.2% and 3.0%, respectively, in April.

Any downshift in those inflation expectations should be seen as good news. An uptick, on the other hand, could create some agitation for the stock and bond markets ahead of next week’s inflation readings.

Ahead of today’s open, the 2-yr note yield is up two basis points to 4.83% (but down 20 basis points since FOMC day on May 1) and the 10-yr note yield is up three basis points to 4.48% (but down 16 basis points since FOMC day on May 1). 

The Russell 2000 for its part is up 5.4% from its low on May 1, leading all comers in the post-FOMC rally effort. If nothing else, that outperformance is a preview to the underperformance that will follow if there is an inflation scare next week and rates shoot higher as a result.

Clearly, though, the market’s assumption throughout this week is that there won’t be an inflation scare and that the Fed will find some policy comfort in the coming inflation reports.

Tucked in between that macro view has been a spate of earnings results that have produced their share of positive and negative surprises that have precipitated outsized moves in individual stocks, yet no disruption to the improved price trends for the major indices that have been relishing the new version of the Fed put.

Originally Posted May 10, 2024 – New spin on the old Fed put

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