US Stock Markets Celebrate on the Fed’s Easing of Rate Hike Concerns and on the Talking Down the US Dollar

Russian physiologist Ivan Pavlov, in his classical conditioning experiment, used the ringing of the bells to stimulate or alert (conditioned) dogs that food was present.

All it took for the US stock markets to reverse gear from fear to greed has been for officials of the US Federal Reserve to assuage the public on rate hikes and to talk down the US dollar (implied easing).

The intraday chart of the S&P 500 from stockcharts.com reveals of the vertical lift off from post Fed minutes

First the verbal easing, from the BBC: (bold mine)

US markets rose sharply after minutes from the September meeting of the Federal Reserve were released.

The transcript indicated that US central bankers were wary of raising rates too soon.

Officials were worried markets were too focused on a rate rise happening during a specific period of time.

The minutes reveal an eagerness to assure observers that a rate rise would be linked solely to positive economic data.

The Fed has kept its benchmark federal funds rate - which determines other short-term interest rates in the US economy, from car loans to mortgages - at 0% since the end of 2008, when the financial crisis hit.

Now that the central bank has announced an end to its extraordinary stimulus measures - which included buying bonds to keep long-term interest rates low - focus has shifted to when it will raise the short term rate.

Then the specter of a strong dollar, from the Telegraph: (bold added)

The US Federal Reserve has raised fears that the strengthening dollar and weak growth overseas could lead to a drop in American exports.

Officials at the central bank said that slowing growth in Europe, Japan and China could limit demand for goods produced in the US. Meanwhile, they also worried that the strengthening dollar would make foreign goods and services seem cheaper by comparison, holding inflation below the central bank’s 2pc target.

“Some participants expressed concern that the persistent shortfall of economic growth and inflation in the euro area could lead to a further appreciation of the dollar and have adverse effects on the US external sector,” the Fed said in the minutes of its September meeting, published on Wednesday.

The schizophrenic rally has been broad based…

…as the US dollar index slumped 

Oh, the Fed seems wishy washy over financial stability risks but renewed her concerns over stock market valuations. From the Fed minutes (bold mine)

The improvement in business conditions was reflected in reports of increased demand for loans at banks in several Districts. Demand rose for loans to both households and businesses, and a couple of participants indicated that borrowers were expanding their use of existing credit lines as well as obtaining new commitments. Bankers in one District stated that, while they had eased the terms and conditions on loans in response to competition from other lenders, they had not taken on riskier loans. Some financial developments that could undermine financial stability over time were noted, including a deterioration in leveraged lending standards, stretched stock market valuations, and compressed risk spreads. However, one participant suggested that the leveraged loan market seemed to be moving into better balance, and that market participants appeared to be taking appropriate account of the changes in interest rates that might be associated with the eventual normalization of the stance of monetary policy. Moreover, a couple of participants, while stressing the importance of remaining vigilant about potential risks to financial stability, observed that conditions in financial markets at present did not suggest the types of financial stability considerations that would impede the achievement of the Committee's macroeconomic objectives.

Slowdown in Europe, Japan and China?  Who cares, stocks surge!

Fed warns again of “stretched stock market valuations”. Who cares, stocks soar!

Like Pavlov’s dogs all it takes for the market to trigger an autopilot frenzied bidding has been for the Fed to utter E-A-S-I-N-G (here implicitly)

Everything else doesn’t matter. Stocks are bound to rise forever!