Fed Halt Now Baked into the Cake

Yesterday’s moonshot was a marvelous thing to behold. The market took off on soft PPI and housing data, lit the second stage boosters on Janet Yellen’s dovish comments, and then kicked in the afterburners on the Fed minutes.

Still, these one day wonders have not been long lasting over the past few years. The rally on Tuesday smacked of panic buying, with shorts scrambling to cover and longs pressing their bets. It was not what one would call a day of quiet contemplation on Wall Street. Panic — in either buying or selling — is rarely rewarded in the markets.

Yesterday’s gains brought most indices back over their first week highs, with the NDX and the Dow Utilities as the notable exceptions.

The net net results are twofold: First, the market has (once again) priced in the end of the tightening cycle. This is now the fourth such rally based on the "end" of the Fed Cycle. Each of the prior "One & Done" rallies have failed, as the Fed has continued to tighten.

Second, the good news is now mostly baked into the cake. This now sets up Markets for two potentially disappointing scenarios:  One, the Fed doesn’t stop at 5% (watch the June FOMC meeting). Two, the Fed pauses — but being "data dependent," is then forced to resume tightening by the continued broad price rises driven by Chinese demand and excess global liquidity.

I view this Pause/Resume scenario as the most perilous for the markets. It paints Bernanke (so much for muscularity) as a dovish appeaser of equity markets. Even worse, it will give the markets paroxysms. The most damaging Pause/Resume situation that occurs is more commodity driven inflation forcing the Fed’s hand, while higher energy prices and slowing real estate pinch the consumer.

Finally, it is quite revealing how atypically dependent this economy and market actually are on government stimulus:  Money supply increases, deficit spending, tax cuts, and of course, ultra low interest rates are the drivers here — not organic growth.


As we have discussed previously, in the past the last Fed hike has not been a market friendly event — I’ll have more on this later. Its a classic issue of confusing causation with correlation. Everyone likes low interest rates, and associates that with stimulus. But the end of the rate hiking cycle will occur when the Fed sees the expansion phase of the economy ending. And in most cases, when economic expansion ends, often Bull Markets do too.

Stay tuned . . .

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What's been said:

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  1. Mark commented on Apr 19

    Now we have another stimulus Barry. FOMC minute language. Don’t tell me that the writers didn’t know the effect that little gift sentence would have.

  2. me commented on Apr 19

    Barry, congrats on the CNNmoney quote

    “”Markets don’t make a top and then slide, topping is a process,” said Barry Ritholtz, chief market strategist at Ritholtz Research. “Typically markets make an initial top, back off, try to surpass it, and can’t do it.””

  3. trader75 commented on Apr 19

    Someone call Dean Wormer. This market is now on Double Secret Probation.

  4. vfoster commented on Apr 19

    the end of tightening won’t come for free. Bernanke will be sacrificing the dollar for asset prices just like he explained back in 2002 when he talked of helicopter money. the dollar is still weakening since yesterday and looks to break support at 88 on DXY. like one global fund manager said, the Fed can control the internal price of money but not the external price. this won’t be good for the bond market and the yield curve will likely widen. i seem to recall everyone chastising W Buffett for being short the dollar when it rallied last year. the same chastising him for not buying tech stocks in 1999?

  5. D. commented on Apr 19

    If Fed halts, dollar weakens. If dollar weakens, inflation will pick up its already concerning rate. If inflation picks up, rates will go up some more.

    Fed must reduce dependancy on imports and/or imported capital smoothly. Inflation is picking up and the best way to escape it is to reduce consumer consumption. Must keep on raising rates.

    If they stop raising rates now, the US dollar will drop quickly as other countries start raising their rates. Every 25 beep increment takes 12-18 months to show its effect. 12-18 month is better than tomorrow. The last thing the Fed should want is for the dollar to drop before consumers and China have had time to adjust and the US has had time to refinance 2T in short term paper.

    It’s not about economic growth anymore and I just don’t see how the Fed could be finished.

  6. rob commented on Apr 19

    pause/resume I think. this scenario would represent the classic “maximum damage” model as it would draw the masses back into the market just in time for the pilot light on the incinerator to be relit. On a seperate note, the friends daytrading on the side meter is skyrocketing again, been dorment for years.

  7. vfoster commented on Apr 19

    the love fest on CNBC this morning showering Greg Ip and his article on Fri calling for a 5% pause was quite amusing… veteran Fed watcher John Berry of bloomberg called the 5% pause in an article on 3/15….

  8. Idaho_Spud commented on Apr 19

    Exactly D.

    The dollar took a beating yesterday, and it’s continuing today. Anything imported (which is everything nowadays) now costs 0.5% more than it did before they released the doves, or rather the dovish statements.

    But I guess everyone on Wall St. Main St. and DC are happy now that we can all kick back and wait for vast unearned liquidity-driven wealth to flow into our coffers, LOL.

  9. todd commented on Apr 19

    This one might sell off a little quicker… sorry about that CPI number this morning bulls! LOL 10-year note selling off again and gold at $625? Glad i’m not long.

  10. Bear Mountain Bull commented on Apr 19

    Baked In

    Barry Ritholtz at The Big Picture has some great comments on yesterdays rally, and what it means for the market – especially in the case that the Fed isnt actually done come June:
    The net net results are twofold: First, the market has (on…

  11. zanzibar commented on Apr 19

    Good post. The Fed pausing is baked as folks have been expecting it for a while. The issue in my mind is less the cost of money -aka rates, but the quantity of money and credit.

    Are we now moving to the next rolling asset inflation with commodities on fire as housing cools ? Emerging market bond spreads, VIX and continued growth in CDSs, ABS reflect continued lack of risk perception.

    Like generals fighting the last war Bennie and other CBs keep focused on deflation while the opposite is happening. Sure the CPI and other “manipulated” data don’t show it but everyone living in the real world is experiencing cost inflation from health premiums to gas to tuitions.

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