I’m sure this week will be interesting, given the CPI and PPI reports. I’m sure the administration will have plenty of on-again and off-again policy statements about something. The one thing that seemed clear by the end of last week is that Trump and his team only care about one thing right now, and that is getting 10-year rates lower. By definition, that means pushing the stock market lower.
I know everyone in the media and on social media has said Trump won’t let the market go down, but Bessent and Lutnick have said the opposite for some time. It became clear that there was no Trump put when Bessent said there was no put, just a call on the upside. Unfortunately, if the desire is to get the 10-year rate lower, then the economy will need to slow to get to the Fed to cut. That means financial conditions will need to tigthen, which means credit spreads need to widen, and the stock market needs to fall. It is really that simple.
While the Fed says that policy is tight, we all know that policy is not tight. Financial conditions are east, credit spreads are narrow, inflation is running at 3%, and inflation expectations are breaking free, which is why the 10-year rate is elevated. But more recently, we have seen financial conditions tighten as credit spreads and the earnings yield of the S&P 500 widen. These are really the first signs that Trump’s policy is working and transmitting through the economy.
I know the view will be that monetary policy’s long and lasting lags are finally catching up to the economy, but we all know what train left the station a long time ago. If monetary policy is transmitted through financial conditions, the long-lasting lags finish in November 2023. Fiscal policy can also be transmitted through the economy by financial conditions, and one just needs to jawbone the market in place, which the administration appears to be able to do at present.
The question is how far this goes, and that seems hard to figure out. Unfortunately, looking at charts really isn’t going to help here. I know we can use charts for direction and trends, but relying solely on that is becoming increasingly difficult.
The other problem is that the market is in negative gamma, which is making for very wild price swings. Based on where we closed on Friday, we should remain in negative gamma to start the week.
I think that anyone expecting the market to rally to new highs is not listening to what is being said, and for now, what is being said is that 10-year rates need to come down. Whether they come down is another story, but by saying they want 10-year rates to come down, they are saying they want growth to slow, and the best way to get growth to slow is to bring the stock market down and tigthen financial conditions.