Can Jerome Keep the Fire From Spreading?

Wall Street’s on a heater—but with inflation smoldering and rate cuts on the line, can Powell play firefighter-in-chief without getting burned? We unpack the Fed’s next move, market momentum, and the sparks flying from tariffs and politics.

Summary – IBKR Podcasts Ep. 254

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Andrew Wilkinson 

U.S. stocks rose for nine days straight through the end of the week, ending May the second, marking its longest winning stretch since 2004. To discuss the latest on economic data and markets, I’m joined by Chief Market Strategist Steve Sosnick. Morning, Steve. 

Steve Sosnick 

Good morning, Andrew. 

Andrew Wilkinson 

And Senior Economist Jose Torres. Good morning, Jose. 

Jose Torres 

Good morning, Andrew. Steve. 

Andrew Wilkinson 

All right, so Steve, let’s start with you. The longest winning stretch in—what—21 years for the stock market. Can it last? 

Steve Sosnick 

Can it last? Sure. Should it last? That’s probably a little bit trickier. But I—you can’t call—you, it’s very, it’s almost impossible to just count this market out. The love that investors have for buying dips and chasing rallies is quite pronounced, and it was very much in evidence. Momentum as a factor is great when it’s going in your favor. It stinks when it’s not—and it was going in people’s favor for the last few days. That was a big plus. And as a result, off we went. Can momentum continue? Sure. Might it—do we have the potential to have a big momentum changer this week in the name of Jerome Powell? Absolutely. So we’ll see what happens. 

Andrew Wilkinson 

Okay. Jose, last week was massive for economic data, culminating in a still-strong display from the employment report. What struck you most about the economic releases last week? 

Jose Torres 

I thought the negative GDP print was quite significant because you got that 0.3% contraction. But under the hood, the numbers are actually pretty strong—namely, consumer spending and business investment. Business investment was the strongest it’s been since the pandemic recovery in the fourth quarter of 2021. We had three weaker-than-expected employment reports last week—Tuesday, JOLTS; Wednesday, ADP; Thursday, unemployment claims. But then Friday payrolls—we did get that big beat. A reminder, as we all know, there has been a tendency for payroll revisions to come in on the downside, so that number’s… It came in at 177; expectations were around 135. We got some pretty good job growth across sectors. The ones that lost jobs barely lost any—that was retail, manufacturing, other services, and utilities. As far as some of the headwinds that may have impeded this kind of number—immigration restriction and government spending reductions—we actually didn’t see that. We saw that the reduction in federal government employees was totally offset, and then some, by hiring in local and state governments. And then as far as immigration restriction offering somewhat of a dampener on labor market growth, we’ve seen the labor force participation rate and the labor force expand pretty significantly into this year. So—pretty good, not excellent economic reports, but pretty good economic data last week. 

Andrew Wilkinson 

Steve, big picture—are investors getting accustomed to the new White House? 

Steve Sosnick 

Yeah, to some extent I think individual investors are. Because again, the focus is not on the big picture so much as: Are things going up today, tomorrow, or the day after? I had a friend of mine who was a retired bond portfolio manager describe it as—and let me preface it by saying, I know he was a Trump voter—that we basically elected an arsonist, and then we reward him every time he brings out the fire extinguisher. The problem is, one of these times the Santa Ana winds kick up and the blaze gets out of control. But for now, I think the markets have just come to deal with the idea that chaos is the norm. And they—at least among a—I’m not sure that global investors agree that’s a good thing. But I think domestic investors have come to terms with it, at least in the short term, for now. 

Andrew Wilkinson 

Steve, I’ll come back to you on the bond market in a minute. I wanted to ask Jose—we’ve got an FOMC meeting coming up this week for May. Any optimism there for an interest rate cut? 

Jose Torres 

No. Our market only offers 6% odds of a cut. I don’t think you get a reduction this week. There’s been pressure from the White House to lower borrowing costs. June, however—the path there is a lot wider. Our prediction market is at 39% for a cut at the June 19th meeting, which is in roughly six weeks. I think to get a cut this week, you would’ve needed a payroll report that was much worse. But I do think that in June, we do get a reduction. Inflation has been cooperating. Energy costs—today, crude oil is trading at an over four-year low when you exclude its recent low made a few weeks ago. Declining energy costs are going to offset some of the inflationary pressures from goods, if we get them, that are tariff-induced. So inflation—2.3% headline PCE—I do think you can sneak in a cut or two before you get a potential uptick in goods inflation. 

Andrew Wilkinson 

Steve, what are your thoughts on— 

Steve Sosnick 

Yeah, may I? Because I just want to point out that Jose is very much—at this point—outside the consensus. And that may—there’s nothing wrong with that, by the way. Right now the prediction markets—whether it’s Forecast X or the CME FedWatch—they’re both in the 30% range. That’s come down significantly after the good economic news that Jose discussed earlier. They’re basically around—the first full cut is priced in for July. But it was almost a deadlock, dead certainty for July, whereas now it’s not—it’s not 100% certain. It’s a little bit less. I think the problem I have here with pushing—with the difference I have, it’s not a problem—the difference I have is that: Number one, I think Chairman Powell does not want to look like he’s getting pushed around. And considering that the 90-day forbearance ends on July 2nd, I believe—the June Fed meeting is before that. So I think he’s well within his rights to say, “I’m gonna wait and see even one more time.” And I think he’s so concerned about the Fed’s independence that he’s basically going to—each time the president yells at him, I think his natural impulse is to basically say, “No, not unless I need to.” And the “if I need to”—that’s a “careful what you wish for” type of thing. And so I think he’s gonna have the cover until July to basically say, “I’m not gonna do anything until I know how this tariff stuff transpires.” That’s just—that’s a difference of opinion. I think that had bad economic numbers pushed him in the other direction, he’s not going—he’s not going to play games. But I think that’s the issue that I think we’re facing. Again, I think the market expectations have come down considerably. They were more for looking around four—four cuts for the year. Now we’re looking around three for the year. And I think we’ll find out also more what the bond market is thinking because you have a big auction week. This week we’re taping this Monday morning before the three-year auction. We then have a 10-year auction tomorrow. They take Wednesday off for the Fed meeting. And then auction 30-years on Thursday. So it will be a very big tell, and I’m told indirect bids are the way to look at this as to whether— as to whether there will be a lot of foreign participation in the auction. The Japanese had threatened to stay out of the auction. Then they withdrew that threat over the weekend. China—I don’t know if they’re willing to play that kind of hardball yet. But in general, I just still get the sense that it’s American—it’s Americans buying and foreigners selling. 

Andrew Wilkinson 

Jose, any additional thoughts on the bond market? 

Jose Torres 

I want to talk a little bit about what Steve’s topic earlier. I—Inflation in April, my nowcasting models show the CPI at 2.3%. PCE at 2.2%. When I see the Fed’s target rate at 4.37, that’s positive real rates in excess of 200 basis points on the comparison. You combine that with really energy costs that are plunging and the potential for tariff inflation, right? Just the potential, ’cause we might not actually get much price pressure upticks from the tariffs. Remember in Trump 1.0 we got a little bit of price pressures. Of course that was—the focus was more on China, not everyone else. But I’m optimistic that we can get some trade deals done with some of our allies—South Korea, Japan, India, EU—and then we can focus on China again on the trade front, not necessarily on everyone else. And I think that can get us a cut or two. But your points are all taken, Steve. 

Steve Sosnick 

Yeah. And again I guess where you—where we come in here, Jose, is they’ve been fairly cagey about trying to tell us where the neutral rate is. I think the implication is—and certainly the implication from the Fed and certainly from your comments just now—is that it’s somewhere below where we are now. But I think they’ve been reluctant to say what it was. And I still—and I think one of the things that’s gotta get asked at the press conference, and we’ll see if they answer it, is: If the dual—if the two parts of the dual mandate conflict, do you err on the side of… That is, if labor starts to fall off—and it hasn’t yet; you made some very good points about Friday’s numbers that show that if there’s labor troubles, it’s not—it, they’re not necessarily here yet—but if labor starts to falter and—or prices start to go up, where do you—where—which do they fall— which do they go for first? Is it the fear of risking—of restoking inflation? Is it the—and that’s where I come down on the idea—your points being very good—that’s where I come down on the idea that Powell is more wait-and-see. Because I think he does not want to go down as the guy who cut rates just before tariffs went up. And I think that’s why he’ll want some certainty in that regard, which could come. And that’s why, you know, it—I think we’re all rooting for the idea that we get trade deals and get the tariffs down and out of the way. But I think, barring that, it’s hard to see him wanting—it’s hard to see him being the guy who cuts rates—but going before that occurs, without that policy certainty. But then as we go forward—it does appear that we’re going to—that we’re in a—and I hate to use the word stagflation ’cause it’s—this is not ’70s stagflation—but if you’re in a situation where there are price pressures and there are labor market pressures in the opposite direction, what’s the Fed’s move? Which do they favor? Do you have a sense of that, Jose, or not really? 

Jose Torres 

Yeah. We covered this two months ago. I think 70/30 on the labor side. 

Steve Sosnick 

I seem to think he’s more price pressure-ish and we’ll—we’ll see. 

Andrew Wilkinson 

That’s interesting. 

Steve Sosnick 

…are made of. 

Andrew Wilkinson 

The New York Fed Governor last week, Steve, said he’d be all over any deterioration in the labor market. 

Steve Sosnick 

Yeah, but then there’s some other comments about concerns about price pressures from other Fed governors. So I think even there, I don’t think they know. And I think that’s really what we’re all going to have to—we’re all gonna have to figure out. And I think that’s going to be an important thing to listen for in Powell’s press conference Wednesday. 

Andrew Wilkinson 

Very good. Steve Sosnick, thank you for joining me. Jose Torres, down in West Palm Beach, thanks for joining me. 

Steve Sosnick 

Take care. 

Jose Torres 

Thank you. 

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