I love a turnaround on fundamental news.
Calling a bottom in real time is impossible but the thing that everyone is watching for is a turn from the Fed. That would be easy of Powell himself came out and said 'we're pausing' but that's not the way it goes.
Earlier this week, Kansas City Federal Reserve President Esther George cautioned on hiking too quickly.
"I find it remarkable that just four months after beginning to raise rates, there is growing discussion of recession risk, and some forecasts are predicting interest rate cuts as soon as next year. Such projections suggest to me that a rapid pace of rate increases brings about the risk of tightening policy more quickly than the economy and markets can adjust," she said.
That was brushed off by the market because she dissented at the most-recent Fed meeting for the same reason.
But today the same message came from Fed Governor Waller and St Louis Fed President Bullard -- the two most-notable hawks at the FOMC. Those comments have knocked the implied odds of a hike down to 31% from +80% earlier today.
That's not a U-turn but it's a sign that the Fed is no longer stomping on the economic brakes. It's possibly the first step in a big, slow turn.
In response, we've seen a 2% drop in the S&P 500 nearly erased. A 12 bps rise in 2-year yields is down to +1 bps. A $6 decline in oil prices has been erased. NZD/USD -- a good proxy for risk appetite -- is back to square on the day. Perhaps most-importantly, a clean break through EUR/USD parity has unwound and it's back trading at 1.0020.
To be fair, the dollar is still significantly higher on the day. USD/JPY is up 150 pips and hasn't given a whole lot back.
The key to what happens next will be in tomorrow's US retail sales data. The Fed's Waller specifically cited it and next week's slate of housing data is key to 75 bps vs 100 bps.
The consensus on sales is +0.8% m/m and +0.3% on the control group. Waller said those would need be 'materially' higher than anticipated. That puts markets in the position of 'bad news is good news' and for the dollar it's 'bad news is bad news'.
The charts don't yet show a reversal but the inability to press and hold new lows is a potential start. Oil is particularly compelling as it broke the March/April lows and the 200-day moving average before turning around and closing back above. There, EUR/USD, AUD/USD and the Nasdaq will be important spots to watch after retail sales.
