US stocks have opened lower on this Monday morning, but this does come after the major stock averages surged to fresh highs on Friday after Fed chair Jay Powell hinted the job market may be cooling enough to justify a rate cut as soon as next month.
Now beyond the Fed retail earnings dominated last week, no big surprises, but companies did warn.
Rising price pressures as inventory cycles turn over and in bonds we saw the 2 to 5 year yields dropping 10 basis points after Powell spoke.
Now this week the Fed's preferred inflation gauge PCE along with Nvidia earnings, regional Fed surveys, and the kickoff to South Side conference season does begin.
Well joining me as we kick off a Trading week is Steve Sosnik, chief strategist at Interactive Brokers.
Steve, good morning.
Thank you so much for joining me today.
Well, the Federal Reserve does seem to be shifting how they think about rates and policy, moving away from just watching the lower bounds.
So how do you see that playing out for investors trying to balance inflation and growth at the same time?
Well, good morning, Remy.
I still think the Fed is trying to do that.
I think I, I don't want to lose sight of the fact that, you know, the Fed is, he did mention that he was in favor of keeping the inflation targets in mind and actually the Fed kind of surreptitious.
To say surreptitiously, but very quietly lowered their inflation statement, the FOMC statement to say that they're not really willing to abide by something greater than 2% inflation.
They are willing, it's 2%, not 2.5%, not 2.7%, not 2.9%.
It's 2.
But in his speech, I would say that Powell shifted the burden of proof, and we've gone pretty much from Thinking that prove me why I need a rate cut to prove me why I don't need a rate cut, and that was what the market took to heart.
Another thing though to keep in mind is that the market ended up for the week only up about 0.3%, which we're essentially giving back this morning so far.
So it was really just there was a little bit of risk aversion coming into the number and then, you know, it all evaporated after after the sheriff spoke.
Yeah, and Steve, usually Jackson Hole, Wyoming ends up being a snooze fest.
But of course, given all the politics involved with the central banks, there's a lot of focus on Powell's speech.
And as you mentioned, Powell dropped some hints about rate cuts in heading into the rest of this year.
So how should investors be thinking about positioning their portfolios and are there certain sectors or investments that you're more excited about right now?
Well, I think it's not fair to just decide that, you know, he just gave us the all clear to go back in the pool.
I think that's how the market interpret it, you know, and the piece I wrote on Friday was Green Flags are up because, you know, I guess I've been hearing a lot about how no swimming was allowed at most of the East Coast beaches and Um, red flags were up and Powell basically said put up the green flag, at least that's what the market heard.
Remember, it's not what the market, it's not so much what he says, it's what the market chooses to hear.
And what the market chose to hear was that rate cuts are coming.
Interestingly, you know, as of Friday, the rate cut expectation for September was 83%, which is quite high.
On the other hand, it was at 105% just a week ago.
Um, whereas we were looking for the market was looking for not only a certainty of a rate cut in September, but actually the hope for 50 basis points in September.
So this just tells you, I think, more about the market psychology and also more about what I've been noticing is what I call a ratchet effect in the stock market.
We go down, we go down slowly, but then when we go up we go up.
Big because all the people jump into the market, um, jump into zero dated options, uh, to give them a little bit of short term, short term leverage.
On a Friday that gets really magnified because, um, you not only have the usual, uh, daily expirations in, in indices and ETFs, but also 600 plus, um, ordinary stocks and ETFs.
That have weekly expirations, so these things get very magnified, and I think the market has a little more work to do.
I think that, you know, there was some shifting.
There was some certainly love for small caps because they were up over 3%.
But in general, I think this is more, it's more about the market psychology in many ways than it is about what the chairman said himself.
Yeah, and Steve, based on what you just said, the central bank also talked about bigger long term issues such as tariffs and of course immigration that can potentially shake things up.
So how do those factors make it harder to predict what's next and how are you dealing with that uncertainty?
Well, I think we can't throw out the idea of data dependence.
They didn't throw that away, so I think data dependence is still there, and we're going to get probably one of the most important data points from the Fed point of view on Friday when core PCE comes out.
And let's see if that number starts to reflect the tariff pressures.
Each of the last 3 months, that number has risen from a low number to a slightly higher number to a slightly higher number, but it's moving in the wrong direction.
And a lot of that is being driven by services which don't have any really actually anything specifically to do with the tariffs.
So there are a lot of moving parts here, and I think it, I think the market may be wrong to just sort of decide let's give it the all clear.
I think what I've been doing is, I think it's strategic from time to time to, to, you know, purchase insurance.
I've been saying all along, don't fight the tape, insure, insure against it.
And when you have a VIX that has a 14 or a low 15.
Or to it, that's a relatively cheap time to do so.
By the way, another thing to keep in mind for this week is Nvidia earnings, which I think are by far the most consequential number from a stock market point of view, but it dwarfs all the other earnings.
So I think there's some importance here about risk management.
I think that the market interpreted that as let's go all in on risk again.
I'm not sure that that was actually the intent of what Powell was saying.
Well, Steve, we will have to leave it there, but we will have you back once the month of September kicks off and after we get the non-farm payrolls and unemployment rates.
So Steve, thank you so much for joining me this morning and as always, thank you for all of your insights.
Thank you so much, Remy.
See you soon.
