Stock Volume Blew Up as Powell Explained His ‘Telegraphed’ Shift

(Bloomberg) -- The rate cut itself may have been telegraphed, but Jerome Powell's press conference Wednesday clearly came as a shock to stock traders.

Volume exploded as he spoke. About 549,000 of the most popular S&P 500 futures contracts changed hands between 2 p.m. and 3 p.m. New York time, the most for any hour this year. At its worst level, the cash index was down 1.8%, an intraday drop that dwarfs any on the day of a meeting since Dec. 19, when the Federal Reserve was raising rates.

In what struck some as a lesson in the dangers of loose diction, a few words from Powell -- calling Wednesday's interest-rate cut a “mid-cycle adjustment” -- sent anxiety swirling that a full-blown easing period isn't at hand. While stocks bounced from the lowest level and ended July with the sixth gain in seven months, it was a reminder of how vulnerable investors are to tiny shifts in sentiment in a year when not much else is going right.

“The Fed is the one and probably only factor that's driving risk assets higher,” said Sameer Samana, senior global market strategist for Wells Fargo Investment Institute. “If they disappoint going forward, that's going to be a major problem, given the lack of support from anywhere else.”

Read more on Powell's past missteps at press conferences

Words are pretty much all equity traders have to go on nowadays, particularly Powell's. After last year's 20%+ surge, profits are stagnating. As of Wednesday, companies in the S&P 500 are on track to report a 0.8% rise in second-quarter earnings. Virtually all of this year's rebound -- and it's still 19% in the S&P 500 -- reflects an expansion in valuations to levels that aren't far from where the fourth-quarter sell-off began.

“If you step back and say, ‘what reason would I have to be bullish today?', it really begins and ends with the interest-rate environment that is controlled by the Fed,” said David Spika, president of GuideStone Capital Management. “None of the fundamentals matter right now, none of the fundamentals are being considered -- it's all about Fed policy, it's all about that safety net.”

While traders generally favor transparency and gave Powell decent marks for his last few press conferences, today they worried his volubility proved a drawback as he struggled walking the line between policy and expectations. Some heard hints of his performance in December, when his staunchly hawkish stance preceded the worst leg of a sell-off that became the worst of the bull market.

For his part, Powell described today as “well-telegraphed. What we did today was very consistent with what we said we were going to do.”

It isn't the first time central bank policy makers have struggled with a consistent message. Two weeks ago, Fed Bank of New York President John Williams stoked a rally with statements some interpreted as suggesting he favored a half-point rate cut. A spokeswoman later clarified that Williams's prepared remarks were “an academic speech on 20 years of research. It was not about potential policy actions at the upcoming FOMC meeting.”

Powell's testimony on Wednesday also provoked uncertainty.

“His message was unclear in terms of what was driving this cut or whether it was even needed,” said Marvin Loh, global macro strategist at State Street. “He seemed to struggle with explaining how the Fed was going to be looking at the global and domestic economy from a monetary policy perspective.”

The S&P 500 Index closed down 1.1 percent after the Fed chairman said the quarter-point cut amounted to a “mid-term policy adjustment,” fueling speculation the central bank is not necessarily at the start of an easing cycle. The measure rebounded after Powell said the Fed hasn't ruled out further cuts -- though the uncertainty didn't go over well with investors.

“There's definitely a communication problem. There's far too many people out there talking about what market expectations are and that the Fed has to meet them,” said Michael O'Rourke, JonesTrading's chief market strategist. “Maybe the market deserves to be flat this year and has to adjust to it. He should not coddle it or cater to it. It's been a mistake, and he's going to be the one who pays the price for it. Because every time he doesn't give more now, you'll get a negative reaction.”

--With assistance from Vildana Hajric, Sarah Ponczek and Luke Kawa.

To contact the reporters on this story: Lu Wang in New York at lwang8@bloomberg.net;Elena Popina in New York at epopina@bloomberg.net

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Chris Nagi

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