Bond yields are falling. And fast. The question is why? In short, the bond market is now pricing in a recession. It sees growth stalling… and believes the Fed will embark on rate cuts in the second half. But have equities got the memo? Not yet. They are trading at close to 19x forward earnings… as big tech drags it higher. From mine, I think the market feels vulnerable here.
Oil: Headed Back to $100?
November last year I felt there could be an oil supply shock in 2023 – sending the price back over $100. This week OPEC+ surprised the market by announcing cuts of 3.7M barrels of oil per day – around 4% of global supply. The price of WTI surged back above $80. I think we go higher from here… which won’t help Jay Powell’s fight with inflation.
Market vs The Fed
There is strongly divided opinion on whether the Fed’s decision to raise 25 bps this week was the right thing to do. What should the Fed prioritize? Financial stability or prices of goods and services? The Fed chose the latter. However, Powell added he does not see rate cuts in his base case for 2023. However, that’s not what bonds are pricing in. They see the Fed cutting rates by a further 100 bps this year. A reckoning is coming… one of them has it wrong.
Fed’s 2% Inflation Goal: A Long, Slow Fight
Another month, another hotter than expected inflation report. This time it was one which the Fed focus on: “Core PCE”. Expectations were for 4.3% YoY – it came at white-hot 4.7%. Where is the problem? Simple… services. And until we see unemployment tick higher… core services inflation will remain sticky. The Fed has a long fight on its hands… and the market is only recently connecting those dots
For a full list of posts from 2017…