We went from pricing in six rate cuts in November last year, to delaying the first rate cut from March to May. And then to pricing in just one rate cut by the time May arrived. We then bounced between that and two rate cuts over the last few months, before suddenly going back to five again in just a week.
If there's a lesson to be learnt in there, it is that to never trust market pricing when emotions are running high. Traders have not had a good read on the Fed's next step and amid all the chaos and panic this week, are we really sure they are getting it right with the latest pricing? I'm very doubtful about that.
I mean this is the same bunch of people that took Powell's message to heart on Wednesday and thought somewhere between 50 to 75 bps of rate cuts this year sounded about right. And now, they're saying that perhaps 125 bps is not enough? Geez. Pardon my skepticism.
There was definitely a bad mix of things in the past week piling on one another. The BOJ rate hike added to the slowing jobs growth picture, which was definitely also exacerbated by some added focus on the so-called Sahm Rule in the build up. Both of that played into the corrective spell in equities, one which is a less talked about factor. I mean hey, since when are technicals "sexy" in selling a story eh?
The yen surge also added to that as we are arguably seeing a massive unwinding of carry trades since last year. And one can argue that it's about that. Not least after all the hype surrounding the AI boom during that period. It is one foundation which I still can't quite feel confident enough, though it's hard to argue with market sentiment.
And so the AI boom has now turned into a mini-bust of sorts. That is getting investors and traders to be kicking and screaming. So, who do they turn to in order to pacify their needs? Of course it's the Fed.
Mind you, after the Friday close, the S&P 500 is still up 12.1% and the Nasdaq is up 11.8% so far this year. Is there really a need to go batshit crazy and even call for an emergency rate cut? That when US Q2 GDP clocked in a growth of 2.8% as well? If anything, it speaks to how insufferable this market has become and how many traders out there are unable to tolerate losses.
So again, if there is a lesson to be learnt, it is to stay calm and fade the panic and fear around markets. When those extremes start to settle down again, it will become clear that we'll move back to a more realistic take in the Fed pricing. One which I would argue was right before the US jobs report last week.
But perhaps one thing is for certain after this, it is that equities may not find it so easily to post one-sided gains over the last eight months. Volatility is back, baby.