Thursday, May 4, 2023

Morning Note: Pardon My Skepticism

J. Powell pretty much confirmed in yesterday’s presser that the Fed is done raising rates, but that QT (slowly shrinking the Fed balance sheet) will continue on as scheduled… At the same time he reiterated that inflation remains too high and that — despite the implied pause — they’ll stay at it till their 2% target is hit.

Well, clearly, the Fed believes that inflation has peaked and that it will continue to decline in the months to come… That — given our current economic base case — makes sense to us… However, base effects, post the summer months, will, all else equal, present a tailwind for inflation… Meaning, the inflation prints from July through December of last year were notably lower than they were for January through June, therefore, the year-on-year inflation read for July through December of this year will come off of easy (low) year ago comps…

In other words, the June Fed meeting may very well be an easy no-call on interest rates, but from July-on the year-on-year inflation prints may be such that they dare the Fed to resume hiking rates -- that is, unless, as our work suggests (in H2), the economy is either in, or seriously threatening, recession… In which case, disinflationary forces should sufficiently overcome those easy inflation base effects -- although perhaps not to the extent where we’re talking the Fed’s 2% target… Which, if the Fed sticks to their present story, would prevent them from helping the economy out with rate cuts.

The operative word in that last sentence is “if.” Pardon my skepticism, but if the economy is threatening a serious contraction, I highly suspect that for the Fed it’ll be inflation-be-damned, and that they’ll cut regardless of whether that 2% target has yet been hit… In which case, alas, it’ll actually be “stagflation-be-damned.”

Stay tuned…

Asian stocks leaned green overnight, with 9 of the 16 markets we track closing higher.

European markets are trading lower as, as I type, the ECB's rate policy presser is underway, with 16 of the 19 bourses we follow in the red so far this morning.

US equity averages are lower to start the session: Dow by 201 points (0.61%), SP500 down 0.53%, SP500 Equal Weight down 0.71%, Nasdaq 100 down 0.29%, Nasdaq Comp down 0.40%, Russell 2000 down 1.36%.

As for yesterday's session, US equity averages (save for small caps) finished slightly lower: Dow down 270 points (0.80%), SP500 down 0.70%, SP500 Equal Weight down 0.58%, Nasdaq 100 down 0.64%, Nasdaq Comp down 0.46%, Russell 2000 up 0.37%.

This morning the VIX sits at 19.90, up 8.34% (!!!).

Oil futures are down 0.41%, gold's up 0.05%, silver's up 0.36%, copper futures are down 0.12% and the ag complex (DBA) is down 0.36%.

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

Among our 37 core positions (excluding options hedges, cash and money market funds), 13 -- led by Albemarle, Amazon, URNM (uranium miners), VWO (emerging mkt equities) and AMD -- are in the green so far this morning... The losers are being led lower by Disney, Apple, ITA (defense stocks), XLF (financial stocks) and XLC (communications stocks).

"...the future we encounter is likely to be very different from what most people expect." 

--Dalio, Ray. Principles for Dealing with the Changing World Order

Have a great day!

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