Powell Pumps The S&P 500

S&P 500 Grinds Higher

The S&P 500 reversed sharply to the upside on Friday after Jerome Powell’s Jackson Hole speech was more dovish than expected.

Powell indicated that the labour market weakness warrants interest rate cuts.

The recent Nonfarm Payroll report, and more specifically the revisions to prior reports, were weak.

However, given that Trump recently announced that U.S. immigration is net negative, that would suggest that the unemployment rate is a better guide to the health of the labour market.

The most recent PPI report signalled that inflation is likely to remain above the FED target of 2% and, on balance, is rising.

On that basis, there must be something that Powell is seeing in the labour market or economy that, despite inflation between 3 and 4%, warrants a rate cut.

When the FED cuts interest rates in a stagflationary environment of rising inflation and weakening labour, historically, the markets fall.

FED Speak

Historically, the FED has also been poor at predicting what is going to happen in the economy. Despite having 20,000 employees, including 900 PhD economists, it does seem to be constantly behind the curve.

Yet investors and institutions continue to hang on every word.

If the FED effectively cuts rates at the front end of the yield curve, that doesn’t mean that the 2-year, the 10-year and the 30-year yields have to follow. In September 2024, the yields increased.

That would indicate a bigger problem in the economy that could cause even more disruption in the marketplace.

In our view, it’s fiscal policy and not monetary policy that will likely play the leading role in shaping the direction of markets.

That said, the market response to the speech was positive, and the index climbed 1.5% to end the day just short of all-time highs.

Caution

As retail investors, we remain cautious. The rally on Friday may simply extend the opportunity for institutional investors to sell into retail.

On the flip side, lowering rates could release equity in money market funds (currently sitting at around $7 trillion) that would seek a home in the stock market and hard assets.

On a separate note, the charts show that while the futures were selling sharply overnight into Friday, the momentum reversed sharply to the upside at around 3 am on Friday. If you are one of the investors who had the ‘insight’ to enter the market at that time, we would be happy to accept an invitation to connect on LinkedIn.

S&P 500 Key Levels

The S&P 500 opens in positive gamma today.

The gamma flip zone sits at 6265; the call resistance level is 6500, and the put support level is 6100. The index needs to break and confirm above the 6540 level to maintain current trend.

Nvidia earnings this week will likely shape the direction of the market.