The latest set of economic numbers support a ‘goldilocks’ scenario for stocks. For example, durable goods orders continue to fall (a positive for inflation); and employment remains robust (a positive for growth). The question is what could cause the Fed to cut rates mid next year (given this is what is priced in)? I will offer two reasons… both of which I think are unlikely before June.
Fed Warns, Stocks Shrug
“We still have a long way to go” – that was the not-so subtle warning from Jay Powell this week. After what many felt was a slightly less hawkish Fed Chair last week – sparking an equity rally – Powell attempted to adjust his tone at an IMF event. Was he successful? That’s hard to say – as equities seemed to shrug off any warning from the Fed – surging ahead to be up 15% year-to-date. Here’s my question: are investors being too sanguine about what’s still unknown?
Why Powell Oscillates b/w Dovish & Hawkish
Is Powell dovish or hawkish? The answer is he is both. And it’s intentional. Part of the Chairman is looking in the rear-view mirror (strong jobs, GSP growth, wage pressure and inflation); and part of him is looking ahead (weaker growth; falling jobs; lower inflation). He straddles both sides. But what she he pay more attention to? The answer is the latter – but he can’t ignore the former. That said, I also think the Chair’s choice of language was interesting. He believes above trend growth and strong jobs are what’s causing inflationary pressure – maybe in part. But I will argue it’s the lagging effect of monetary policy… when you increase money supply by 40% in just 2 years.
Fed: We’re Not Finished Hiking
Let’s start with a quick quote from yesterday’s missive: “From mine, Powell will deliver a hawkish tone leaving the door wide open for further hikes in November or December if needed”. That’s exactly what he said. From my lens, Powell sounded hawkish today – reminding investors they are are not done hiking. Not yet. And if I’m to be blunt – he has sounded hawkish at every meeting this year. But investors will often choose to hear what they want to hear. Be conscious of what biases you have. The script is higher for longer and the market is yet to adjust. It will.
For a full list of posts from 2017…