Fed Governor Christopher Waller Sparks Surprise Market Rally
It was a surprisingly upbeat day on Thursday with breadth running about 56% positive and the S&P 500 jumping about 1%. The economic reports on Thursday morning were not great and oil was higher again, but bonds rallied and the odds of a rate hike at the September meeting dropped sharply after comments from Fed Governor Christopher Waller.
Waller Was Not That Dovish
What Waller actually said was not quite as dovish as what the market apparently heard. He said that if inflation continues to show signs of decline over the next two weeks, then a hike would not be needed at the September meeting. That is a big “if” there. He did not offer a strong view of inflation in either direction, and he made clear that the August CPI report on September 11 would drive his decision.
A market that rallies on a conditional statement like that is a market that was positioned for something worse. I suspect a lot of folks were leaning bearish in front of the August jobs report on Friday morning and the Waller comment scared them into repositioning. That is what the action looked like. A sharp move on the comment, then breadth declining and some churning late in the day.
The odds of a quarter-point hike by the end of the year came down, but not by much, to around 82% from about 89% on Wednesday. The September meeting moved from a likely hike to a coin flip. The year did not change.
Question for Friday
The jobs report on Friday morning is now much harder to read than it was a week ago. All summer, the market treated weak employment as good news because it reduced the pressure for a hike. Waller’s comments reinforced that logic. If the number is soft, the September hike odds fall further and the bulls have their argument.
The problem is that weak jobs would be arriving while oil is at a two-month high and European inflation sits at a three-year high. The aroma of stagflation is wafting in the wind. That is not a scenario where a lower hike probability helps much, because the reason for the lower probability is that growth is slowing while prices are not. The market will have to decide which reading it wants to embrace, and the reaction in the first hour on Friday will tell us.
Game Plan
With the important jobs news pending in the morning there isn’t much for me to do at this point. My positioning has not changed and I have plenty of cash. I dinked around with some trades in Hewlett Packard Enterprise ($HPE) around the post-earnings volatility, and I added to NeoVolta ($NEOV) on the pullback from Monday’s surge.
A one-day bounce on a conditional comment from one Fed governor is not a change in market character. The three days of selling that preceded it were technically significant. I would rather wait and see how the market handles a real number tomorrow than draw conclusions from a day when it rallied on the absence of a hike rather than the presence of anything factually positive.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre was long HPE and NEOV.
