Fed Meeting Tomorrow..Expect Nothing

1.) FED – Of course, all the “news” is about the Fed meeting that will conclude tomorrow with a rate decision and press conference. Kevin Warsh is the new Fed Chair, and ever since he was sworn in, a chart has been making the rounds. It shows how poorly the stock market has performed during the first few months after a new Fed chair takes over. The implication is obvious: “Be careful. The market is about to test the new guy.” Here’s the problem: The market doesn’t really care who the new Fed chair is, at least not the way people think. By the time a new chair actually gets the job, investors have already spent months, and often years, thinking about all the possible outcomes. So to say I’m skeptical about this “chart” is an understatement. The scary chart is below, but maybe it’s more about markets just doing what markets do versus all about a “new” Fed chair. I mean, stocks experience pullbacks all the time. But a 5% decline feels incredibly important when there’s a new Fed chair. The same 5% decline during any other random quarter barely gets anyone’s attention. That’s the issue with charts like this. It tells you what happened but not why. Much of the weakness in the average data comes from very specific times in history. The Great Depression. The chart becomes a lot less dramatic when you focus on the modern era. Ben Bernanke inherited a housing bubble that eventually turned into the Global Financial Crisis. Jerome Powell inherited a pandemic, supply-chain disruptions, trillions of dollars in stimulus, and the highest inflation in forty years. Extraordinary environments, to be sure. Yet the market drawdowns following modern Fed leadership changes generally look a lot like the normal drawdowns we see all the time. As I always say…ignore the headlines. Focus on numbers. If the market is going to “test” Warsh, it’ll show up in interest rates (specifically federal funds rate futures market), not in a random 3% or 5% move in the stock market. For anyone unfamiliar, fed funds futures are simply a market where traders place bets on what they think the Fed will do with interest rates. If investors suddenly thought Warsh was going to be much more aggressive than Powell, or much more willing to cut rates, we’d see it immediately reflected in futures pricing. The futures market is pricing in no change at Warsh’s first meeting this week, no change at the July meeting, and no change at the September meeting. Steady as she goes.

2.) GOLD – Could gold potentially be getting close to a capitulation area? Maybe. Net flows data suggest that it is either here or getting very close. Gold is approaching a very strong level of resistance at the $4,430 area. If it gets rejected there, then not enough capitulation has occurred. Moreover, our flow-based algorithms have not yet repositioned back into gold.

3.) OIL – Seven days ago, I commented that due to oil price action, $80 would not be surprising over the next several weeks. Well, that was fast as the crash continues with WTI now down to $78. Big support sits at the $75 area. Oil volatility continues to crash as well, now down 73 points from the March high. Typically, assets with decelerating/declining volatility attract capital. That likely remains true if the unwind of the backwardation of the crude futures curve and the disinflation at the front and back parts remain as well. Translation? Oil likely sees lower prices over the next several months with bouts of volatility and headline-driven periodic price spikes that probably fail. The first test is that $75 area.