Equites sank further on Friday and oil hit a four-year low as FRB Chair Powell signaled the damage of a trade war will be bigger than anticipated, with the potential effects including higher inflation and slower growth.
Despite his possible ominous warning, Powell reiterated a wait and see approach on rates. Markets, however, have fully priced in four Fed reductions this year and 50% chance of a fifth.
The S & P 500 and NASDAQ sold off further on Powell’s comments as some were hoping there would be the proverbial Fed put.
Bloomberg writes that in two days, the S & P 500 has shed almost $5 trillion, the worst rout since March 2020. For the week, the benchmark declined 9.1%, the biggest weekly decline since March 2020.
The NASDAQ is in bear market territory, defined as a drop of 20% or more. The swiftness in the decline from its February high is only matched by the pandemic meltdown of 2020 and the 2000 dot com implosion. The Magnificent Seven is down about 26% from its apex. NASDAQ 100 has declined about $6.4 trillion since mid-February. Wow!
March’s solid unemployment data could not offset Friday’s carnage. Jobs increased at a pace considerably faster than anyone had anticipated. The Unemployment rate did tick up to 4.2%, the result of an increase in the Labor Participation Rate (LPR). Pay gains were “firm.”
The hard data is continuing to surprise on the upside indicating a robust economy. However, many believe this is “yesterday’s data” and the data will get significantly worse in the immediacy.
For example, the government stated that federal employment has fallen by 12,400 this year, a number that is not even a rounding error. For March only 4,000 federal workers lost their jobs, about the same number of workers fired by META during the month. However, it is expected 280,000 federal workers and contractors could ultimately lose their jobs with some projecting as many as 500,000.
Perhaps the only certainty to write is that uncertainty is at levels not experienced in many years. The outcome is unquantifiable.
Perhaps what is not unquantifiable is that if the economy deteriorates by the degree that the bond market (i.e. 2-year Treasury yield which is at the lowest level since 2022), the odds of an electoral change at the 2026 midterms rise exponentially.
Legendary Democratic strategist James Carville has stated that his party should do nothing and just watch things implode, an implosion that would usher in a Democratic majority.
Reiterating a prior remark, the outcome is unquantifiable as some believe the President is only posturing for a level as to where negotiations commence. Moreover, the impact of currency translations is unknowable.
What will happen this week?
The economic calendar is comprised of the CPI and the PPI, Inventory data, the Minutes from the recent FOMC meeting and a sentiment survey.
Last night the foreign markets were down. London was down 4.54%, Paris down 4.70% and Frankfurt down 4.33%. Chins was 7.34%, Japan down 7.83% and Hang Seng down 13.22%.
Dowa and NASDAQ futures are off their lows, down 2% and 3%, respectively. The 10-year is down 5/32 to yield 3.99% as the yield curve is steepening. Markets are now pricing in 125 bps of easing by year’s end.
