Thursday, November 3, 2022

Morning Note: Mixed Messaging From the Fed

Interesting action yesterday... While listening to the official statement issued along with the announcement that the Fed funds rate will be bumped by .75%, Nick and I agreed that stocks should indeed be rallying, as they were at that moment.

Reason being this (new) language in the statement:

"...the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments."

Unequivocally, that's dovish (or, let's say, less hawkish) relative to prior meetings' statements... It essentially says, "yes, as you've gathered, we're a little spooked by recent tremors across global currency and credit markets."

However, chairman Powell effectively walked back that language during his press conference -- which jibes with my message in yesterday's video... I.e., the recent action across markets serves to alleviate some of that early-October angst the Fed was clearly feeling. Hence, they can come off more hawkish than they would have were the meeting held 3 weeks ago.

I was therefore surprised by the somewhat market-accommodating language in the statement, but not at all by Powell's handling of the press conference.

Of the two, however, the language in the statement was more telling in the grand scheme of things... Meaning, yes, if something systemic begins to break, the Fed will swoop in to attempt to mitigate the damage... They indeed fear that they’ll be (or be perceived to be) the cause of the very break they’ll be scrambling to fix.  

In the meantime, they see room to nudge their benchmark rate higher and to continue to talk more or less* tough on inflation. 

*The official statement -- and the market's reaction to Powell's presser -- says we should anticipate soft(ish) talk from select Fed members over the coming weeks.

Tomorrow's jobs number is the next big landmine facing markets this week. Stock futures accelerated a bit to the downside upon this morning's weekly jobless claims report -- it came in slightly lower than expected.

Asian equities got hammered overnight, with 14 of the 16 markets we track closing lower.

Same goes for Europe so far this morning, with 17 of the 19 bourses we follow trading down as I type.

US stocks are lower to start the session: Dow down 262 points (0.81%), SP500 down 1.10%, SP500 Equal Weight down 1.15%, Nasdaq 100 down 0.97%, Nasdaq Comp down 0.97%, Russell 2000 down 1.57%.

The VIX sits at 26.50, up 2.47%.

Oil futures are down 2.12%, gold's down 1.03%, silver's down 1.15%, copper futures are down 2.02% and the ag complex (DBA) is down 0.80%.

The 10-year treasury is down (yield up) and the dollar is up a massive 1.51%

Among our 35 core positions (excluding options hedges, cash and short-term bond ETF), only 3 -- Brazil equities, Dutch Bros and Amazon -- are in the green so far this morning. The losers are being led lower by Albemarle, cyber security stocks, water stocks, tech stocks and Sweden equities.

"We should never become so enamored with the strong points in our thinking that we overlook the weakest links in the chain."
Levy, Dan. Maxims for Thinking Analytically

Absolutely critical to long-term investing success!

Have a great day!

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