About Yesterday's Rally (Technically Speaking For 5/5)

May 05, 2022 5:58 PM ETDIA, IWM, QQQ, SPY6 Comments
Hale Stewart profile picture
Hale Stewart
10.57K Followers

Summary

  • In his opening statement, Fed Chair Powell spoke directly to Americans about high inflation.
  • The Fed thinks it can reduce the job vacancy rate without hurting the jobs market or causing a wage-price spiral.
  • The markets sold off today.

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Tzido/iStock via Getty Images

Chairman Powell's opening statement from yesterday's press conference:

Before I go into the details of today's meeting, I'd like to take this opportunity to speak directly to the American people. Inflation is much too high, and we understand the hardship it is causing, and we're moving expeditiously to bring it back down. We have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses. The economy and the country have been through a lot over the past two years and have proved resilient. It is essential that we bring inflation down if we are to have a sustained period of strong labor market conditions that benefit all.

I can't think of a time when the Fed chair has spoken, "directly to the American people." Obviously, he wants to address the very understandable concerns people have about price increases, with the intention of saying, "We've got this." The Fed chair is clearly signaling that controlling inflation is the Fed's key policy focus right now.

Here's why the Fed chair thinks the Fed will be able to administer a soft landing.

I'll give you a couple of reasons for that. One is households and businesses are in very strong financial shape. You're looking at, you know, excess savings on balance sheets, excess in the sense that they're substantially larger than the prior trend. Businesses are in good financial shape. The labor market is, as I mentioned, very, very strong. And so it doesn't seem to be anywhere close to a downturn. Therefore, the economy is strong, and is well positioned to handle tighter monetary policy.

All good and accurate points. I think he's overlooking the fact that economic fortunes can change very quickly. For example, it was a few short months ago that the Fed argued inflation would be transitory.

Finally, the Fed Chair makes this interesting point about how the Fed can engineer a soft landing:

There's a path. There's a path by which we would be able to have demand moderate in the labor market, and have, therefore have vacancies come down without unemployment going up, because vacancies are at such an extraordinarily high level. They're 1.9 vacancies for every unemployed person, 11 and a half million vacancies, six million unemployed people. So we haven't been in that place on the vacancy, you know, sort of the vacancy unemployed curve, the Beveridge curve. We haven't been at that sort of level of a ratio in the modern era. So in principle, it seems as though by moderating demand, we could see vacancies come down. And as a result, and they could come down fairly significantly. And I think put supply and demand at least closer together than they are. And that that would, that would give us a chance to have lower, good to get inflation down, get wages down, and get inflation down without having to slow the economy and have a recession and have unemployment rise materially. So there's a path to that.

This is the first time I've seen the idea that a drop in vacancies will help to alleviate price pressures without harming the labor market. Intuitively, it makes sense.

Let's take a look at the charts.

1-day SPY, QQQ, DIA, and IWM

1-day SPY, QQQ, DIA, and IWM (Stockcharts)

So much for yesterday's, "75 basis points is off the table" rally. Today, prices gapped lower at the open and then continued moving lower for the remainder of the session.

3-month SPY, QQQ, DIA, and IWM

3-month SPY, QQQ, DIA, and IWM (stockcharts)

Today, the chart printed a solid down day, wiping out yesterday's gains.

Tomorrow, we get the latest employment report. Let's hope it's a good one since prices are hanging in the balance.

I'll be back on Saturday with a macro wrap-up.

This article was written by

Hale Stewart profile picture
10.57K Followers
Hale Stewart spent 5 years as a bond broker in the late 1990s before returning to law school in the early 2000s. He is currently a tax lawyer in Houston, Texas. He has an LLM in domestic and international taxation (MagnaCumLaude). He is the author of the book The Lifetime Income Security Solution. Follow me on Twitter at @originalbonddadYou can read his legal analysis on his law office's blog.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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