Pro Perspectives 3/10/25

 

 

 

 

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March 10, 2025

We've been watching this trendline in the Nasdaq.  It traded into the line on Friday (precisely on the number) and bounced 500 points. 
 
Today it gave way …
 
 
So, now we've broken this key trendline that represents the AI-theme — a trend that was catalyzed by the launch of ChatGPT back in November of 2022.
 
And we have a similar trend in the S&P 500 that has broken down — this line, representing the rise in the anticipation of a Fed easing cycle
 
 
With this S&P chart in mind, remember, back in October of 2023 the Fed had stubbornly held rates well above 5% (the orange line in the chart below), while inflation was on a consistent path lower (blue line). 
 
 
As you can see in the chart, the longer the Fed held rates steady, the tighter policy became, as inflation continued to fall.  And it was the bond market that ultimately forced the Fed's hand. 
 
The Fed finally folded when the 10-year yield hit 5% (the danger zone for financial stability) and stocks were in an 11% correction.  They walked back on a final rate hike they were telegraphing and began to start telegraphing the easing cycle. 
 
Yields fell. Stocks began this 50% climb (the S&P chart above).
 
Staying with this S&P chart, you can see the path of rate cuts along the way. 
 
December was the Fed's last cut.  And remember what came with it — a hawkish policy adjustment (at least in the form of "guidance").
 
With that December cut, the Fed showed its bias on Trump policies in their Summary of Economic Projections (SEP), proactively revising UP their view on growth AND inflation.  And they took two projected rate cuts off of the table.
 
Then they hit pause on the easing cycle in late January.
 
And with that, and the influence of Fed rhetoric, as of one month ago the market had priced in a small chance of ZERO rate cuts this year.
 
So, this was a big swing in interest rate expectations, for the roughly six weeks following the December Fed meeting.
 
Meanwhile, two developments have countered the Fed's December outlook: 1) early indications from the Trump trade war suggest disinflationary pressures, as tariffs are dampening global sentiment, and 2) Nvidia's recent earnings, as a key barometer of the tech revolution, confirm that manufacturing capacity constraints are throttling the speed of innovation.
 
Add to this, the coming labor market shock from the DOGE belt-tightening should meet the Fed's condition of "unexpected weakness" in jobs, which is a stated condition (by the Fed) for a "reaction" (i.e. easing). 
 
With all of the above in mind, both the bond market (chart below), and the stock market (charts above), seem to be telling us, the Fed pause was a mistake.