Fed Snoozer -> Tech and Gold Loser

Earlier this week, we wrote that stocks appeared to be yawning ahead of what was likely to be a rather dull FOMC meeting.  Chair Powell, whom I’ve often described as “Goldilocks in a Suit,” took a relatively balanced approach, though he either failed or chose not to offer something for bulls to grasp onto.  Stocks and bonds deservedly closed essentially unchanged.  Meanwhile, amidst today’s tech-led declines and reversals in key assets, the recent S&P 500 (SPX) milestone seems like a head fake.  Let’s dig in.

The FOMC statement offered a few key changes since the prior month.  The main distinctions are:

• Economic activity is described as “solid,” not “moderate”
• The unemployment rate is showing signs of stabilization, not edging up
• Inflation remains somewhat elevated
• A comment about downside risks to unemployment was removed

Once the press conference started, the Chair was assiduous about avoiding some of the key political questions on many viewers’ minds, including:

• The DOJ subpoena that triggered a notable rebuttal video
• The likelihood that Powell will finish his term as Fed Governor even after his term as Chair ends
• What he intends to do if the President picks a successor before May
• The recent performance of the dollar
• His opinion about Senator Tillis’ vow to block new Fed nominees

Despite the demurrals, there were some useful, if not market-moving, policy nuggets that emerged. 

• Inflation expectations have come way down and fully recovered since Liberation Day, reflecting confidence in a return to 2% inflation
• Labor force growth has come to a halt, but demand for labor is declining faster than supply
• There is no macro message from gold and silver
• There is broad support on the FOMC for holding rates steady, and they are not articulating a specific test for when to cut
• We’re at the higher end of neutral, but within range, and it’s hard to say from asset prices that policy is too restrictive – especially after 175 bp of cuts in the current cycle

The last two points are the ones that resonated most with me. 

• The comment about broad support for steady rates might simply be a statement of fact, but it is highly likely that it is also a notification to the next chair that a too-dovish approach might fall on deaf ears. 
• The idea of rates being roughly neutral fits with something I’ve been saying for some time – exuberant markets and tight credit spreads are prima facie evidence that rates are hardly an impediment to many key facets of the economy.

Today, however, markets can hardly be described as “exuberant”.  Pre-market futures indicated that stocks were poised for another ho-hum day, but the mood turned sour almost immediately after the bell rang.  Negativity over Microsoft’s (MSFT) record spending and slowing cloud sales growth led to a -12% decline in its share price, outweighing Meta Platforms’ (META) 8% rise.  In that case, investors’ enthusiasm for META’s positive revenue guidance was greater than their initial skittishness about higher-than-expected capital spending.  The third Mag 7 stock that reported, Tesla (TSLA), faded slightly after an initially positive response to Elon Musk’s comments about technologies other than autos.

Despite the significant price movements in US stocks – SPX is down about -1% as I type this, having recovered from a -1.5% low just after 11 AM ET, and the Nasdaq 100 (NDX) is down about -1.7%, though above its -2.3% (cue the dip buyers) – even more volatility is occurring in popular commodities.  Crude oil futures (CL) were up over 5% at their peak as traders priced in a higher likelihood of US military action in Iran, but some of the craziest moves occurred in decorrelating hedges that have turned into highly speculative darlings.  Bitcoin broke through support at $87,500 and plunged quickly to $85,000.  Most notably, gold and silver, as measured by spot gold (USGOLD) and the silver ETF (SLV), each had swings exceeding 10% this morning.  The intraday moves in gold have been increasing markedly as its upswing has morphed from steeply linear to parabolic. 

There are two things to keep in mind about the recent volatility in precious metals:

1. Parabolic moves are inherently unstable.  They are caused by a powerful combination of speculative fervor and counterparty pain.  At some point, those dynamics resolve themselves, often with major consequences for the last buyers.  The trick, of course, is figuring out when the music is about to stop.
2. Market volatility tends to increase around turning points.  The increasingly huge moves in these commodities may mean that the musicians are preparing to take a rest.

ES March Futures, 1-Day, 1-Minute Candles

Source: Interactive Brokers

CL March Futures, 2-Days, 2-Minute Candles

Source: Interactive Brokers

2-Days, USGOLD (2-minute candles, right scale), SLV (blue line, left scale)

Source: Interactive Brokers

6-Months, USGOLD (daily candles, right scale), SLV (blue line, left scale)

Source: Interactive Brokers

Bitcoin, 2-Days, 3-Minute Candles

Source: Interactive Brokers