Thursday, January 19, 2023

Morning Note: No Love From the Fed

Yesterday's action very much jibed with our near-term thesis for the equity market... I.e., data releases (save for mortgage apps) were resoundingly weak (recessionary even), while Fed speakers -- even the doves -- reiterated that the tightening cycle still has a ways to run:    emphasis mine...

Harker (dove): "...reiterating comments he made last week, said increases of 25 basis points would be appropriate going forward. “I think we get north of 5 - again we can argue whether it’s 5.25% or 5.5% - but we sit there for a while,”"

Logan (dove): "“A slower pace is just a way to ensure we make the best possible decisions,” Logan told an event at the University of Texas at Austin’s McCombs School of Business. “We can and, if necessary, should adjust our overall policy strategy to keep financial conditions restrictive even as the pace slows.”"

Bullard (hawk): "“We’re almost into a zone that we could call restrictive - we’re not quite there yet,” Bullard said in an online Wall Street Journal interview, explaining that price pressures remain too high and officials must not “waver” on bringing them steadily down to the Fed’s 2% target.

Policy has to stay on the tighter side during 2023” as the
disinflationary process unfolds, he added, saying that he
penciled in a forecast for a rate range of 5.25% to 5.5% by the end of this year in the Fed’s December dot plot of projections."

Mester (hawk): "“We’re beginning to see the kind of actions that we need to see,” Mester said in an interview with The Associated Press published Wednesday. “Good signs that things are moving in the right direction.”

Mester didn’t disclose how big a rate increase she favored
when officials next meet, but stressed that she wants rates to keep moving higher."

Yeah, no love right here for stocks from the Fed. 

Now, despite the hawkish (rates to stay higher for longer) Fed talk, our bond exposure (presently consists of treasuries and emerging mkts) experienced an exceptionally strong session yesterday... Which speaks to the weak data, and, we presume, to the Fed's apparent willingness to see the economy into recession before considering (or being forced into) changing direction.

Interestingly, however, the stocks of economically defensive (and interest rate sensitive) sectors (consumer staples and utilities) were the worst performers on the day...

Asian stocks leaned green overnight, with 7 of the 16 markets we track closing higher.

Europe's a mess so far this morning as well, with 17 of the 19 bourses we follow trading down as I type.

US stocks are following through on yesterday's selloff, to start the session: Dow down 189 points (0.57%), SP500 down 0.53%, SP500 Equal Weight down 0.76%, Nasdaq 100 down 0.46%, Nasdaq Comp down 0.55%, Russell 2000 down 0.67%.

The VIX sits at 21.21, up 4.28%.

Oil futures are up 0.70%, gold's up 0.60%, silver's up 0.16%, copper futures are down 0.25% and the ag complex (DBA) is up 0.15%.

The 10-year treasury is down (yield up) and the dollar is down 0.17%.

Among our 36 core positions (excluding options hedges, cash and short-term bond ETF), 7 -- led by Vietnam equities, our emerging mkts etf, gold, developed Asia-Pac equities, and silver -- are in the green so far this morning. The losers beign led lower by AMD, financial stocks, Nokia, AT&T and water stocks.

"Think of the central bank as having a bottle of stimulant it can inject into the economy as needed. When the markets and the economy sag, it delivers shots of the money and credit stimulant to pick them up. When the markets and economy are too strong, it gives them less or no stimulant. These moves lead to cyclical rises and declines in the amounts and prices of money and credit, and of goods, services, and financial assets."

--Dalio, Ray. Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail 

Note: There'll be no morning note tomorrow... The weekly economic update will come your way late this weekend.

Have a great day!


  1. Quick question:
    What are M2 data? What would happen when you have a drop of M2 data vs. GDP?

    1. Hey Sam, M2 stands for the money supply metric that captures consumers' cash on hand, savings accounts & short-term deposits (CDs)... One can surmise that a drop in money supply is a tightening in overall financial conditions which would ultimately serve to slow the economy (gdp)...

      "Quantitative Tightening" (QT), for example, is the term used to describe the Fed reducing its balance sheet via selling its bond holdings -- essentially draining liquidity from the economy (trading bonds for cash) in an effort to slow things (inflation) down.

    2. Thanks for the explanation Marty! Have a great weekend!