We see markets probe all the time, and right now, it seems we’re in a probing mood, searching for that “put” where a policymaker panics. As of Friday, however, it was falling on deaf ears—and Powell certainly didn’t help by sticking to the message of patience.
That was definitely not what the stock market wanted to hear. The S&P 500 was down about 2.8% heading into Powell’s Q&A session but had rallied nearly 2.5% off its morning low. Still, Powell offered the stock market nothing.
On top of that, Powell suggested that these new tariffs could create more inflation than expected—again, not what the market wanted to hear. So, if Powell had intended to calm the markets, he had the chance and passed. He knew where the S&P 500 was trading heading into the event; at 10:50 AM, the index had been down more than 5%. Given the velocity of the move, one could argue that a dovish Powell promising swift and aggressive cuts could have pushed the market back to flat.
The VIX 1-day was rising sharply, hitting 55 just 10 minutes before Powell began speaking. An implied volatility crash could have easily lifted the market, but Powell didn’t come to its rescue this time. Maybe he wants to leave Trump out to dry, or maybe he really is focused squarely on inflation rather than the market. I don’t know. But there’s no Powell put.
With no Powell put and no idea if Trump will be golfing or not, I can’t say what the market will do come Monday. I think anyone claiming to know is just guessing. I can make a case for a bounce and a case for a drop. I don’t think we’re about to see a replay of 1987—only because the market will close if the index falls 20%. That’s the good news; the downside is limited. (Smile—this market will break you if you can’t laugh sometimes.)
Knowing how the market thinks, and if Trump stays silent, which my gut says he will, the market will continue to inflict as much pain as possible until Trump breaks in the ultimate battle of egos. However, the market has been the undisputed heavyweight champ in my lifetime, breaking everyone.
The only problem, as I see it, is that right now, the stock market—by falling—is doing exactly what Trump and his team want: lowering rates. I noted weeks ago that for Team Trump to get rates down, they’d have to tighten financial conditions and push stock prices lower. So right now, as I see it, Team Trump is actually winning.
But remember—the market always holds all the cards. Policymakers don’t. Because the one thing the market controls is interest rates through the Treasury market. And when rates begin to rise in a UK-style, Truss-like moment, it’ll be game over for Trump’s tariffs.
In case you missed it, the 10-year rate finished the day down just four basis points after rising more than 14 bps off the 3.86% intraday low at 7:30 AM.
Naturally, most of that move came after 11 AM, when Powell said no cuts were coming anytime soon.