Afraid of the Fed

The Fed is no longer the market's friend.  How else can you explain the post Powell reaction after his Humphrey Hawkins speech in February (S&P tanked from 2790 to 2647) and his first FOMC meeting in March (S&P tanked from 2740 to 2560).  Now the fast money traders are going to sell first and wait to see what bombshells Powell will drop this time.  He definitely doesn't feel like a Yellen clone to me, as many proclaimed when he was nominated last fall.  Yellen would have softened her tone on rate hikes after a steep drop in February, but Powell kept the same rhetoric, slow and steady rate hikes with expectations for higher but stable inflation and low unemployment. 

It is clear that Powell has decided not to provide a Fed put anywhere close to current stock index levels.  But will he act this brave when the yield curve gets even flatter, and the global economy slows even more?  I doubt it.  The Fed is an institution that is there to save financial markets, not drive them into a brick wall.  Europe and China are now slowing, and considering the long term fundamentals of both of those economies, the most likely scenario is continued slowing which will pressure the ECB to give up on their rate hike plans and encourage China to postpone any deleveraging that they thought they could push through.  Instead, you have the PBOC pushing through RRR cuts already and are done with their tightening cycle. 

The US economy is still showing steady growth, but the tax cut effects will start to wear out quickly if the stock market doesn't go higher.  The shrinking portion of the US economy that actually is economically sensitive is now heavily dependent on the wealth effect of stocks.  The poor will stay poor and have no effect on stocks.  The middle class has acted more like the lower class since 2008, so their behavior is not as variable as in the past.  The wages are stagnant with low growth, so their spending can only go up so much before the credit cards and loans are maxed out.  The demand for cooks, waiters, and waitresses is less economically elastic than most other sectors.  And most of the new jobs have been in the lower paying service sector.  So I don't expect a big spike in unemployment in the next recession, it will just be even less wage growth and lower inflation. 

The S&P 500 is trading much weaker than I expected, and the only thing I can point to is bond yields staying near 3% and the dollar getting stronger, as it is sniffing out weakness in Europe and Asia.  A weaker dollar is what helped the S&P levitate effortlessly last year, so a strengthening dollar is a definite negative, especially for big caps.  With the Fed meeting tomorrow, I don't expect any surprises from Powell, he probably just repeats what he said in March, as nothing much has changed except the S&P being lower by about 3%, and the yield curve slightly flatter and dollar a bit stronger.  That might make him lean less hawkish than at the last meeting, but I wouldn't count on it.  Powell seems hell bent on inverting the yield curve by bashing the short end into oblivion.