I. Stocks, Bonds & Waller
Today, the S&P 500 had its best day in a month as Treasury yields edged lower and the dollar dropped to its lowest level since May. The policy-sensitive 2-year Treasury yield retreated to 4.34% after briefly rising to 4.41% on Tuesday. These moves reflect a decline in the probability of a September rate hike to about 50%, down from 70% earlier this week.
The catalyst was comments from Fed Governor Christopher Waller. While he said he's willing to hold the policy rate steady if progress toward the Fed's 2% inflation target continues, he also stressed that it would not take much evidence of persistent inflation pressures to support a hike. With recent data showing "some signs of disinflation," the burden of proof is now on the inflation data to justify a hike.
The financial markets concluded that Waller is an owl, i.e., an FOMC voter watching incoming inflation data before deciding whether to vote for a hike at the Committee's September 15-16 meeting. We reckon that of the 12 voters on the FOMC, five are hawks (i.e., ready to hike), while six are owls. That's why bonds and stocks rallied today when Waller joined the latter birdies.
They also rallied today because the yen rebounded, without any intervention by the Bank of Japan, on expectations that the central bank will soon raise its policy rate and on second thoughts about a Fed rate hike (chart).
The good news is that stocks should do well, as Fabulous Earnings Momentum (FEMO) reported by Broadcom, Dell, and Snowflake continues to support the bull market. Our two favorite bull-bear ratios remain relatively neutral, providing neither a strong buy nor sell signal (chart). FEMO, however, is sending a loud buy signal!
