Correcting the Narrative

You're hearing in the media -- not just from the President, but from no small number of market actors as well -- that the Fed essentially gets the blame for the latest turmoil in the markets. This morning's bounce in the pre-market on less than expected inflation news may embolden that narrative. While, in fact, it debunks it. 

There is absolutely nothing reported this morning, not even a .1% miss in the CPI, that would remotely waver the Fed from its present rate-hiking path. What it does do is momentarily alleviate the fear that the economy will have to deal with rapidly rising inflation on top of the trade disruptions (which, ironically, and alas, mean higher prices [inflation] for the consumer).

There is indeed a problem, however, with the Fed's timing. Even though companies will be citing tariff risk as their biggest concern, that looks for now like it will fall on the deaf ears of those who might do something about it. Instead we'll hear (already are) that this has nothing to do with tariffs and everything to do with the Fed. Frankly, it couldn't be more the opposite!

Here's BofA's chief economist making sense this morning ("quantitative tightening" refers to the Fed's current policy):

“We are worried about a lot of things -- trade wars and oil
sanctions come to mind -- but we are not worried about
quantitative tightening,’’ Ethan Harris, chief economist at Bank of America, wrote in a recent report to clients titled
“Quantitative Frightening.’’ 

The following, from the same article, should sound familiar to clients:

Ultimately, the impact of policy normalization could be a rotation within asset classes, rather than a wholesale exit
towards cash. That suggests a shift toward financial stocks as interest rates rise, with groups like technology struggling. 

 Expect more volatility in the near-term...