Pro Perspectives 8/15/22

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August 15, 2022

Stocks start the week shrugging off some negative news data out of China.
Tomorrow, we’ll get Walmart and Home Depot earnings.  Remember, Walmart “pre-announced” late last month, cutting the profit outlook, and setting a low bar.  This sets up for, if anything, a positive surprise for markets. 
Now, with that in mind, let’s take a look at the technical picture on the broader market as we also head into two important Fed events coming over the next ten days.
Remember, we looked at this chart last week of the S&P 500.  

As we discussed, the stock market decline in the first half had everything to do with the fear of draconian global central bank action (led by the Fed), as they threatened to crush inflation with aggressive interest rate hikes.
And now stocks have made an 18% run in just two months, triggered by:  central bank inaction
The bark was far worse than the bite.  After a lot of talk, the Fed Funds rate sits 600 basis points under the rate of inflation.  They were bluffing.
As you can see in the chart, these central bank moments have clearly been catalysts for stocks on the way up. 
And here we are again, heading into another central bank moment with the Fed minutes coming on Wednesday — just as stocks are running into a big trendline, and the 200-day moving average.  Both the yellow line (the trendline from the all-time highs) and the 200-day moving average (the purple line) come in around 4,325 — just above today's highs.
That said, the minutes of the July Fed meeting shouldn't mean much for markets.  It was comments made by Jay Powell, in the postmeeting press conference, that carried all of the weight.  He let the genie out of the bottle. 
Remember, he called the new Fed Funds rate of 2.25%-2.5% neutral (no longer accommodative)! 
And he said they would no longer "guide" on policy, but rather take things meeting by meeting, depending on the data.
Again, this is revealing.  If they had any intention on containing inflation with interest rates, they would have done it by now.  They haven't.  Powell admitted as much (that it's near the end of the cycle) with the above statements.
This sets up for another big central bank moment next week
The most powerful central bankers in the world gather in Jackson Hole, Wyoming at the annual Kansas City Fed's Global Economic Symposium.
Jay Powell will be the show.  He will deliver a prepared speech, and a Fed insider at Reuters has suggested he will talk about the Fed's balance sheet (the quantitative tightening program).
Remember, the short history of central banks reversing quantitative easing (QE) hasn't been a good one.  Things tend to break in the financial system, and central banks tend to find themselves back in the business of QE.  
To this point, Jay Powell and company have suggested that the plan they are executing to shrink the balance sheet is "on track."  Yet their own reports (as of the last Fed meeting) show they've sold just a third of the assets they had planned to at this point in the program.
So, even as the Bank of Japan has continued its unlimited QE, as the provider of global liquidity to the world, the ECB has still had to resurrect a plan to backstop eurozone sovereign debt markets, and the Fed has only been able to do a fraction of its planned "liquidity extraction."
With this in mind, there's a decent chance that Powell could use this speech at Jackson Hole, to reset expectations on the entire QT plan.
That would, of course, be very bullish for asset prices.