Wednesday, May 11, 2022

Morning Note: Timidity...

While listening to Bloomberg live this morning to catch the March CPI number, and the market's response, an interview with former Federal Reserve Board member Bill Dudley captured my attention.

As for the CPI number, and the market reaction, I'll just say that what I presented as a potential catalyst for a rally this week, well, it whiffed. The month over month core (ex food and energy) inflation number came in at 0.6%, which was 0.2% above the consensus forecast. The headline year-on-year number was 8.3%, core was 6.2%; both slightly lower than the previous month, but higher than expectations -- and the minor relative YoY softness was all about base effects (the fact that inflation was running hot last year at this time).

Clearly, markets were expecting something far tamer: Prior to the announcement Dow futures were up over 300 points, the S&P was up just over 1% and the Nasdaq Comp was up 1.6%. They plunged into the red within seconds of the release.

Here's some of what Mr. Dudley had to say this morning:

"I think the problem is that the Fed has not been forceful enough in stating not just what their goal is, 2% inflation, but the means to achieve that goal. Chair Powell in his press conference last week didn't really want to talk about why monetary policy might actually not just have to go to neutral, it might have to go to tight. And I think a tight monetary policy is what's going to be required to get inflation under control."

When asked "why are they timid," he replied,

"It's not clear to me. Clearly they're talking about what the end goal is. But to me, if you're talking about the end goal, 2% inflation, you also have to describe how you're going to get there. And if you start to sugar coat it, then financial conditions don't tighten as much, and you also run the risk that people will lose confidence in the Federal Reserve."

With regard to the Fed's timidity, in my humble view, they're timid because they are desperate to engineer the fabled "soft landing;" the quelling of inflation without crashing the economy. Recall my comment in Monday's morning note:

"Bottom line, they simply can't have it both ways -- if taming inflation means tightening the screws on financial conditions, asset prices suffer... Which, by the way, aids them in that task (lower equity prices, for example, by itself tightens financial conditions)."
Clearly, they know they can't have it both ways. And if asset prices truly tumble (no, folks, the 16% SP500 hit so far this year, is not, historically-speaking, a true [consequential] tumbling), while, as Mr. Dudley (and me on Monday) implies, that'll do much of their job (tighten conditions) for them, it indeed could take the economic plane into what you might call a "hard landing." And, make no mistake, that possibility has them timid...

Interestingly, in the time it took me to type the above, stocks have bounced off of their lows and our now firmly back in the green. There's quite the slate of Fed speakers scheduled this week, I'm guessing one of them may be offering up something consoling to markets this morning. In any event, coming off of 5 consecutive weeks in the red, an oversold bounce is very due right here. Hopefully it sticks, but, please, don't hold your breath just yet...

Asian equities leaned green overnight, with all but 10 the 16 markets we track closing higher.

Same for Europe so far this morning, with 13 of the 19 bourses we follow trading up as I type.

US stocks are green (tech barely) early in the session: Dow up 248 points (0.77%), SP500 up 0.63%, SP500 Equal Weight up 0.74%, Nasdaq 100 up 0.01%, Nasdaq Comp up 0.01%, Russell 2000 up 0.64%.

The VIX sits at 31.91, down 3.27%.

Oil futures are up 5.22%, gold's up 0.79%, silver's up 2.99%, copper futures are up 2.20% and the ag complex (DBA) is up 1.57%.

The 10-year treasury is down (yield up) and the dollar is down 0.43%.

Among our 37 core positions (excluding cash and short-term bond ETF), 35 -- led by energy stocks, Sweden equities, base metals miners, Latin American equities and AMD -- are in the green so far this morning (but, again, don't hold your breath!). The two losers so far this morning are tech stocks and treasury bonds.

In the words of another ex Fed head:

"Human nature has no role to play in how subatomic particles interact with one another. Our propensities related to fear, euphoria, herding, and culture, however, virtually define finance."

--Alan Greenspan

Indeed, and it applies to monetary policymakers every bit as much as it does to you and me...

Have a great day!

No comments:

Post a Comment