• Volatility under a quiet surface

• The market suddenly is worried about a slowing economy

• But Powell calms the nerves

• Labor market is weakening but maybe in a healthy manner

• Inflation has turned to deflation (for now)

• The consumer is still not optimistic

• Global PMIs in charts (the bad, the good, and the great)

• Housing affordability is still a real issue

• If all else fails, look to profits

• One-liners from Powell and his easing bias

• Quick Hits

• Where did all the crypto money go?

• Chart Crime of the week

You would never know it was a volatile post-holiday period just by looking at the headline indices and macro factors.    Most notably, the notion that big spending would outdo interest rate cuts has been debunked.  It took a weakish employment report and deflation, but the bond market is no longer worried about excessive deficit spending (at least not for now).  Of course, that might mean that the stock market is finally worried about a slowing economy…the “be careful what you wish for” scenario.  But Fed Chairman Powell did his best to say employment was not a problem…just it was in better balance now.  He managed to say this while also ramping up his bias to ease interest rates.  The futures market is now putting a 96% probability of a rate cut in September.  This was 68% a month ago.  For December, the market is pricing in a 99.8% chance of one cut (96% a month ago), a 94% chance of two cuts (71% a month ago), and a 54% chance of three cuts (25% a month ago).

This almost-goldilocks environment kickstarted some of the dormant parts of the market back to life.  Indeed, people had been betting on Big Tech as the quality safe haven in an uncertain economy (labor market softening along with sticky inflation).  But if the Fed was going to provide relief when it was not really necessary (certainly debatable, but we think the labor market is ok even with the fuzzy government statistics) …hallelujah…the small-caps rejoiced.  The Russell 2000 small-cap index rallied over 3% on Thursday while the S&P 500 fell on the day.  Bespoke tells us this magnitude of divergence has only happened once since 1979.  That was in October of 2008…not exactly a screaming buy signal (the market dropped about 30% from October to March 2009).  Actually, it was not just a small-cap rally.  It was an everything-rally except for the previous winners (AI names were hit hard).  Alas, cooler heads prevailed, and people bought the AI dip.  Some are saying more hedge funds imploded this past week.  Probably.  But the prolonged death rotation has seemingly been avoided.