Milton Friedman coined the expression “monetary policy operates with long and variable lags”. In the 1970s – he felt it was up to around two years before those effects are felt. Today it’s believed to be sooner – given open transparency of Fed speak and data tools available. But is it? It’s been two years since the Fed’s first hike and we’re just starting to see labor markets soften and consumer demand weaken. Have the full effects of tighter policy been absorbed? I don’t think so.
"Interest Rates / Bonds"
Something Doesn’t Add Up…
It’s Nvidia’s world and we’re living in it (if you believe the stock market). The S&P 500 (and Nvidia) recorded all new highs post the AI chip maker’s earnings. Be careful paying too much. The rapid rise in Nvidia’s market cap has only seen the market narrow further. And from mine, that makes it more subject to both volatility and risk. Deutsche Bank’s Jim Reid dimensioned the risk another way. He shows how the Top 10% of stocks in the S&P 500 constitute ~75% of the total capitalization. We have not seen that since 1929! The only other time we saw something similar was the dot.com bubble…
Markets Expect only 3 Rate Cuts this Year – as Services Inflation Jumps
Expectations for rate cuts this year are coming down. For e.g., one month ago the market saw at least six rate cuts before the end of the year (possibly seven). I challenged that assumption – thinking three was more likely (not six). Following news of a hotter than expected Producer Price Inflation (PPI) print for January – those expectations are now down to just three cuts before year’s end. That’s more aligned to the Fed’s intended path.
Traders: Forget “6 Rate Cuts” for ’24
The much awaited January Consumer Price Index (CPI) came in hotter than expected – leading to a small sell off in equities (2%) and a jump in bond yields. The US 10-year pushed 4.30%. But the data should not have been a surprise – there are pockets of strong inflation (eg car insurance up 24% YoY). From mine there are two takeaways: (i) don’t expect the Fed to cut “6 times” this year (as I’ve been saying); and (ii) inflation is not coming down as quickly as many assumed. The good news is the direction for inflation is lower – however the Fed may be forced to hold rates higher for longer. The question then is how will that impact middle-to-lower income earnings – who are already struggling? And what does that do for earnings?
For a full list of posts from 2017…