Reverse Pivot

Issue 335

By Jeffrey Trusheim, Chief Financial Officer, Mortgage Solutions of Colorado, LLC DBA, Mortgage Solutions Financial.

Mortgage Solutions presents Issue 335 of Market Pulse. This commentary will provide Trusheim's perspective of the economic, political, and technical considerations that will have an impact on the global & domestic financial marketplace. The report will provide a recap of the previous week's activity as well as a look at the important market-moving factors in the week ahead.

It appears that our Federal Reserve Chairman, Jerome Powell, has found religion and is doing his mea culpa to “make up” for his ill-conceived and premature dovish pivot on interest rates. The Fed Chair and other voting members of the FOMC have signaled that they will wait longer than previously anticipated to cut interest rates following a series of surprisingly high inflation readings.?

Powell pointed to the lack of additional progress made on inflation, noting “it will likely take more time for officials to gain the necessary confidence that price growth is heading towards the Fed’s 2% goal before lowering borrowing costs. If price pressures persist, the Fed can keep rates steady for ‘as long as needed.’ The recent data have clearly not given us greater confidence and instead indicate that it is likely to take longer than expected to achieve that confidence.”

It’s late in the game for Powell and other Fed officials to rethink their dovish pivot made back in December. The damage of signaling easier financial/monetary conditions in the throes of bullish, loose, and excessive market conditions has been done. And IMHO, this damage could prove catastrophic. Readers of this report know that we have been questioning the Fed’s dovish pivot, in the face of a strong economy, rising oil prices, and with Inflation well above the Fed’s 2% target.?

At the start of the year there were expectations of seven rate cuts. At the March FOMC meeting, the Fed’s projections for 2024 pulled those expectations back to just three rate cuts. Now, Wall Street is wondering if the Fed will cut at all this year. As of last Friday, there was about a 70% probability of the first-rate cut coming in September, with a tilt toward a second rate cut in December. I’m still sticking with my “one and done” in 2024, with a tilt to “none and done” this year. Bank of America economists said there is a “real risk” that the Fed won’t cut rates until March 2025, “at the earliest.”

It has been widely presumed that the last mile of the inflation fight would be the hardest. With CPI inflation running “sticky” at 3.5%, and the Fed’s preferred inflation gauge (PCE: Personal Consumption Expenditures) stuck with a 2.8% forecast for all of 2024, getting down to the Fed’s 2% goal is indeed the longest mile. The math is simple: Month-over-month CPI inflation has to consistently come in either flat or up by 0.1%, in order to get the year-over-year CPI reading down to 2% by year end. The monthly CPI data has been running at a 0.2% to 0.4% for the past six months.?

Overall, the Fed remains data dependent, and they have been quite clear in telling us that incoming data would determine its path forward. We remain in the “higher for longer” camp, but for the time being, the next rate move is still likely to be a cut. However, if upward inflation pressures resurface, the Fed’s stance could shift to a hike. And if that happens, the stock and bond markets will be looking to find religion!

THE STOCK MARKET

It was a tough week for the equity markets. The S&P 500 posted losses in all five sessions, falling over 3% and slumping to its worst weekly performance in over a year. During the last three weeks the S&P has declined 311 points, from the March 28th all-time high at 5264 to Friday’s low at 4953. That equals a 6% pullback from the high that has broken key support and most likely has confirmed the end to the bull market.?

The last three Market Pulse Reports have warned of a possible major top forming in the S&P 500 trading range between 5150-5300, with the probability that it is 11:59 on the bull market clock. Well, IMHO, the clock struck midnight and the bull market top has likely been struck. As I have reported in recent missives during the past several months, I personally have exited the stock market, and moved that cash into T-Bills, energy, gold and silver.?

So, what now, you ask? I expect to see a pattern of lower highs on the bounces and lower lows on the declines. The initial decline of 300+ points took out key support in the 5050-5100 region but has gotten a bit oversold. I would look for a corrective bounce into the Fibonacci retracement zone of 5070-5145, where I plan to start a bearish trading position. Initial downside targets are in the 4500-4700 region (10% correction). Eventually, I expect to see a full retracement to the October 2023 low near 4100 (20% correction), as well as the October 2022 low in the 3500-3800 region (30% correction) during the next year or two.?

Observation: One of history’s most over-owned stocks and crowded trades, Nvidia posted a one-session loss of 10% last Friday, and has declined 218 points (22%) from its recent all-time high. On Monday, the Dow was up 600 points early, then fell 1200 points, producing its biggest price reversal in 13 months. These things don’t normally happen in bull markets.?

THE BOND MARKET

Bonds didn’t fare any better than stocks last week, with the hawkish Fed comments forcing traders to continue repricing yields higher in light of fewer (if any) rate cut expectations. The 10-year Treasury yield moved from 4.49% up to 4.69% and finished the week at 4.62%, up 13 basis points (up 75 basis points YTD).?

It appears that the bond market wants to price-in just one rate cut this year. That would put the 10-year Treasury near 4.75%, and the 2-year Treasury near 5%…both very close to current trading levels. IMHO, these yield levels represent value.

It doesn’t appear that the Fed is going to get any help on the inflation front any time soon. Inflation swaps in April are trading at 3.4%, in May & June at 3.5%, in July at 3.3%, and August at 2.7%. Folks, stay on your toes, it could be rough riding ahead.

?

Have a great week!

For licensing information, go to https://mortgagesolutions.net/licensing-retail/

Jeff Trusheim is the CFO of Mortgage Solutions Financial. Jeff is a 30+ year veteran in the Wall Street arena, with a background in economics, risk assessment and finance (banking and mortgage). He has previously worked in Fortune 500 companies in growing their portfolio and economic footprint.