Stocks go on a Powell Rollercoaster Ride, Fed’s Missed Opportunity, Oil rises, Gold volatile, Bitcoin higher

US stocks initially rallied after Fed Chair Powell didn’t take anything back from last week’s dovish FOMC press conference. Powell’s talk with David Rubenstein didn’t reveal anything new, but it will probably go down as a missed opportunity as he could have pushed back on what the market is pricing in.  Rate cut bets for next winter firmly remain intact and that should be an issue for a Fed trying to get inflation somewhere near target.

Fed Chair Powell will likely need to stick to the ‘ongoing rate increases will be appropriate’ script as inflation is still well over twice above their 2% target.  The upcoming Valentines Day inflation report might not have a lot of love for Wall Street as pricing pressures will likely rise from a month ago.         

After listening to another round of Powell’s hits from last week, stocks had to give up earlier gains as traders will likely see the Fed Chair struggle to refrain from being hawkish again after a potentially hot inflation report next week. 

Peak rate expectations will likely be determined next week and as long as we don’t have a scorching inflation report, appetite for risky assets should hold up. 

SOTU

State of the Union might not be market moving but it will be important as it will set expectations on how Biden’s potential re-election campaign will go.  President Biden has the economy in much better shape than a year ago, but only 36% approved how he has handled it. With a divided Congress, it will be difficult to get anything done, which is why he will target unity for cancer research, supporting seniors and veterans, and the war on drugs.

Powell

Fed Chair Powell reiterated that the disinflationary process has begun, but we are at the very early stages.  Powell could have used the hot NFP report as a reminder that they are data-dependent and that markets might be misreading on how long rates will stay higher.   

The pandemic left a lasting mark on labor supply and that the shortage of workers feels more structural than cyclical. It seems that Powell is suggesting he may tolerate a stronger labor market and wait to see if wage pressures ease.   

A year of declining is the base case, but it won’t be linear and the next inflation report could prove troubling for the case for core services disinflation trends. 

Fed’s Kaskari

Fed’s Kashkari said that he is still at 5.4% for the Fed Funds target.  Kashkari believes the job market is too hot and that is why he is not forecasting a recession.  Kashkari today and yesterday’s Bostic comment keep supporting the Fed pushback that Chair Powell failed to do at last week’s FOMC decision. A strong labor market will continue to support the Fed’s plan for ongoing rate increases and it seems that at minimum that should be 2 more quarter-point rate rises. 

Oil

The rebound with oil prices is slowly running out of steam as the disruption of the Ceyhan terminal will be short-lived.  Turkey ordered the resumption of oil flows as non damage was done to pipelines or storage tankers.

Oil may rally a little bit more as many energy traders are still trying to figure out how robust will China’s reopening be this quarter. A strong labor market in the US should prove to be supportive of WTI crude in the short-term, which could pave the way for a rally back towards the $80 level. 

Gold

Gold initially popped with the first take of Fed Chair Powell’s interview with David Rubenstein.  Powell didn’t push back on expectations that the Fed would loosen conditions this year.  Gold is still stuck between the $1875 and $1890 range, but if next week’s inflation is somewhat hot, it could see downward momentum accelerate. 

The risks of two or three rate hikes remain on the table and that should keep gold somewhat grounded.  Peak tightening is getting close to being priced in, but until inflation is below 4%, traders should not be confident the disinflation process is firmly in place. 

Bitcoin

Bitcoin went on a Fed Chair Powell rollercoaster ride and was able to hold onto recent lows. Bitcoin could see further bullish momentum if we signs that the labor market is cooling and as long we don’t have a much hotter-than-expected inflation report next week.  Bitcoin has massive support at $20,500 and resistance at $25,000.

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