Category Fed Reserve

What Banking Crisis?

Are things actually looking up? If your measure is the equity market... you would say absolutely. Stocks continue to charge higher on the back of lower inflation and optimism the Fed is closer to the end of its hiking cycle. What's not to like? However, there's something else giving markets a boost. Easy money! Financial conditions are as easy as they've been all year. For example, it was only 4 months ago and we had a mini banking crisis... where funding was a lot tighter. That's now a distant memory.

Fed Can Keep Raising w/Core CPI 4.8% YoY 

The market celebrated the June monthly CPI data. Headline CPI came in at just 3.0% YoY - and Core CPI fell to 4.8% YoY. Good news. However, with Core CPI still more than 2x the Fed's target - expect them to raise rates again at the end of the month. However, what surprises me is the market believes the war with inflation is basically done. Is it? I think that is presumptuous. The fight with Core inflation will be a long one. If correct, the Fed may not need to keep raising rates aggressively - however are likely hold them there until their objective is met.

Fed Minutes Suggest More Hikes 

Today the Fed released this statement from their latest minutes "The economy was facing headwinds from tighter credit conditions, including higher interest rates, for households and businesses, which would likely weigh on economic activity, hiring, and inflation, although the extent of these effect remained uncertain". But here's the thing: the market could be underestimating how long the lag effect is. Typically it's between 12 and 24 months. However, with an extra $2+ Trillion in (perhaps wasteful) government handouts, that has softened the blow dealt from higher rates. But make no mistake - the lag effects from 500 bps of tightening will come - it's just longer than expected.

‘Higher for Longer’ after May Core PCE

May's print for Core PCE came in 4.6% YoY - still well above the Fed's objective of 2.0%. However, mainstream were quick to label the report as 'lackluster'. Why? Here's the thing - Core PCE has hardly changed the past few months. It dipped in May to 4.62%, from April (4.68%), but was above March (4.61%), and was exactly where it had been in December (4.62%). Put another way - we have made no ground since December - and yet it was now somehow 'lackluster'. But it gets better: core services inflation (without energy services) rose by 5.4% in May YoY. It was fractionally lower than April (5.5%) - but equal to what we see in both March and December (5.4%). Similar to Core PCE - it too is stuck in a tight range for 5 consecutive months. What does all this mean? Simple: rates will be higher for longer and markets don't get it.

Do Ya Feel Lucky… Punk?

"You've got to ask yourself one question: 'Do I feel lucky?' Well, do ya, punk?" - Dirty Harry. In Callahan's case, there might have been just one... maybe two... left in the chamber. Were you willing to take that chance? Sure, Powell delivered what the market expected. However, he reminded us there's still more 'lead in the Magnum 44'. The other day I shared how the market has already priced in a 60% probability for a hike in July. That probability remains unchanged after Powell gave his address. However, beyond July, the market is not expecting any. Remember - only a few weeks ago - the market felt that rate cuts were still possible this year. So... do you feel lucky?

Skip, Pause, Hike or Pivot

It's Fed week. What will the world's most watched central bank do? A surprise hike like Canada and Australia? Unlikely. Maybe time to hit the pause button and take a look around? That's what markets are pricing in. Or will this be a 'hawkish skip' implying their work is not yet done? From mine, if we see Core CPI anything above 5.0% this week - the Fed will tell us their work is not done. Here's the thing: markets are trading back at levels before the Fed commenced their 500 bps of rate hikes. What's more, we find Core PCE still above 5.0%; unemployment well below 4.0%; and wage inflation above 4.0%? What is to stop the Fed from finishing the job? Whilst they are likely to pause - there are more hikes ahead

Bond Market Agrees with the Fed

Two months ago - the bond market was at odds with the Fed. Fixed income markets felt the Fed were going to be forced to cut rates as many as three times this year. For e.g., the gap between the US 2-yr yield and the Fed funds rate was in excess of 100 basis points. At the time I questioned who would be right? Bonds or the Fed? Fast forward to today and the gap has closed considerably... bonds have now realigned with the Fed's way of thinking; i.e. expect higher for longer

Market Cheers ‘Strong’ Jobs Report

Payrolls rose 339,000 for May. That was well above the 190,000 expected - and what seems like a robust report. Is the economy really that strong? The devil is always in the details. From mine, I think the Fed will likely pause on a rate hike this month despite the so-called 'upside surprise'. For example, there is some 'soft' data in the report - soft enough for the Fed to not pull the trigger. Wage growth slowed and the unemployment rate ticked higher. Good news from the Fed's lens.

Could $1.1 Trillion in ‘T-Bills’ Suck Out Liquidity?

Over the weekend, financial media reported a deal in principle to raise the debt ceiling. Based on all reports, the deal sets a two-year spending cap, kicking in October 1. Now if Washington DC agrees to at least slow its spending - they're likely to be doing it during an economic slowdown. And this could have a near-term impact on economic growth and the valuations of risk assets. What's more, if Treasury are permitted to issue $1.1 Trillion in fresh T-bills - what will that do to liquidity? Will banks deposits start looking for a (higher return) home?

Ignore the Debt Ceiling Noise

Mainstream media remain fixated on 'debt ceiling' negotiations - warning of a "financial catastrophe" if this doesn't get done. This is the 78th time we have hit the so-called debt ceiling. And how many defaults has there been? Zero. A deal will get done. And if we are presented with a sell-off in markets - then it represents an opportunity.