Monday, May 15, 2023

Morning Note: The Habitual Fed

In a client discussion last Friday over recession odds and the Fed, I mentioned that the Fed's own staff economists forecast recession (albeit mild) in the back half of the year, while the respective talking heads (FOMC [Federal Open Mkt Committee]) seem too eager to reject that probability.

Hmm.... So what gives?  Well, perhaps the Fed has grown ever-so accustomed to leveraging their "guidance" tool (attempt -- through jawboning -- to set consumer and market expectations in the manner they'd like them to be) to keep folks actively transacting throughout the economy... Folks feel good about the Fed when they feel good about the economy!

I.e., Habitually, in terms of guidance, it's hey, everything's fine, don't sweat it, go book that cruise!

Hence this particular Fed's dilemma... As one side of their two-sided mandate says that they must promote "price stability." 

So, given their inflation mandate, one might -- were it not for the habitual glad-handing -- think that they'd, therefore, break out that guidance tool and tell the world that recession looms and that they best baton down their hatches -- and, let's say, maybe put the cruise on hold for a year or so... 

But, alas, should, in that example, their guidance tool do the trick on inflation, then we're talking rising unemployment... Which, by the way, conflicts with the other side of said mandate -- "full employment."

So, you see, it's all basically akin to politics... When inflation was everyone's hot button, J. Powell vowed to slay that dragon (that his Fed caught a good chunk of the blame for rearing), and actually dared to utter the R word as a distinct consequence... Now that inflation is coming off the boil a bit (as it would/will as the economy slows), and folks seem a bit less panicky about it, suddenly the Fed fears the opposite sort of public wrath, as they'll certainly catch the blame for causing the recession their own economists say is coming.

Yeah, the fact that Powell at one point dared to warn of recession conflicts with what I initially implied... So let's say that today's Fed is habitually (on their own behalf) political.

Note: In all fairness, I will say that theirs is a very tough job... I just think the tough spot they find themselves in is to some degree (perhaps not small) of their own making.

When Powell was recently questioned on the fact that the Fed's own economists are advising he and his team that recession's coming, and how he now publicly resists, if not rejects, the prospects, he essentially stated "we disagree."

Well, check out the NY Fed's own Recession Probabilities Index (red shaded areas highlight past recessions):


Now, in truth, there's nothing fancy, or complicated, about that particular indicator... The NY Fed simply calculates recession odds based on the slope of the yield curve.

We track that as well, and yeah, according to that history, recession odds are very high going forward:

Stay tuned...

Asian stocks were mostly green overnight, with 10 of the 16 markets we track closing higher.

Europe's leaning green at the moment, with 10 of the 19 bourses we follow trading up so far this morning.

US equity averages (save for the Russell) are slightly lower to start the session: Dow by 90 points (0.27%), SP500 down 0.18%, SP500 Equal Weight down 0.07%, Nasdaq 100 down 0.18%, Nasdaq Comp down 0.05%, Russell 2000 up 0.55%.

As for last Friday's session, US equity averages were mostly lower: Dow down 0.03%, SP500 down 0.16%, SP500 Equal Weight up 0.01%, Nasdaq 100 down 0.37%, Nasdaq Comp down 0.35%, Russell 2000 down 0.20%.

This morning the VIX sits at 17.73, up 4.11%.

Oil futures are up 1.21%, gold's up 0.25%, silver's up 0.47%, copper futures are up 0.64% and the ag complex (DBA) is up 0.74%.

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

Among our 34 core positions (excluding options hedges, cash and money market funds), 21 -- led by Albemarle, EZA (South African equities), VWO (emerging mkt equities), LEMB (local currency emerging mkt bonds) and OIH (oil services stocks) -- are in the green so far this morning... The losers are being led lower by Dutch Bros, VNM (Vietnam equities), EMB (emerging mkt bonds), Johnson & Johnson and XLP (consumer staples stocks).

"I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said."
--Alan Greenspan, Former Fed Chairman

Have a great day!

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