Nowhere Man

There was a time when Federal Reserve Chairman Jerome Powell could move markets with a single word. Investors hung onto every syllable, and even a hint of policy change sent equities and bonds into turmoil. Not anymore. Last week, Powell warned that equities looked overvalued and that investors were too optimistic about future rate cuts. The result? Ahem, not much.

The S&P 500 remains within one per cent of its all-time high, and Treasury yields remain calm, far removed from the turbulence seen in January. That suggests two things. First, as the Trump administration adds members to the Fed’s policymaking committee, Powell is increasingly seen as a lame duck with just nine months left in his term. Second, interest rates are headed lower.

The litmus test will come in the form of inflation data. Several months have passed since the largest reorganization of global trade in a century, yet CPI has barely moved. Still, if tariff revenues amount to $350 billion annually, then someone has to pay for that. Well, if it isn’t the consumer or some kind of economic miracle like quantitative easing, it must be the corporations.

With earnings season about to kick off in the next two weeks, the goldilocks scenario for the markets is going to get severely tested. Lest we forget that we need a slowing economy so we can cut rates, but we still require sufficient earnings growth to justify valuations, and, of course, there can be no inflation. What are the odds of that? Probably lower than Liverpool repeating as champions this year, but much higher than Tottenham ever winning the League.