Ignore the Debt Ceiling NoiseMainstream 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.
Expensive and RiskyStan Druckenmiller - one of the greatest investors of all time - is issuing a stark warning. Tread carefully. He echoes much of my sentiment of the past few months; i.e. not only do I think the market is fully valued at 19x forward earnings -- it represents meaningful downside risk. What concerns me most is what the market assumes will happen over the next ~6-9 months. E.g., at the time of writing, it sees rates being slashed three times this year. Is that realistic with Core CPI YoY is still traveling around 5.5%? It also sees earnings growth. Will that happen opposite a recession? It's a long list of assumptions...
If the Apple Falls from the Tree… Does the Tree Fall?Apple managed to beat very low expectations. However, revenue fell for the second consecutive quarter. Nonetheless, the stock was slightly higher on the news. Consider it a safety trade. More broadly, stocks fell today as they wrestled with the threat of more regional bank failures and a committed Fed. Here's my basic question: will we see three rate cuts before the end of the year? My view is we won't see a single cut (let alone three). If I'm right (and I may not be) - there will be a painful adjustment in the market.
“One and Done”… Not Yet The market wanted "one and done"... that was the expectation. Powell spoiled the party. Whilst the market expected a 25 bps Fed hike - what it did not know was whether any hike would be 'dovish' or 'hawkish'? For example, a dovish hike would be something like "we see the end of inflation... we're winning the fight". On the other hand, a hawkish tone would be sentiment to the effect of "it's still premature to make that call". We heard more of the latter... less of the former.
A Very Narrow Market Last week all eyes were on large cap tech earnings. They delivered a mixed bag... but on the whole 'better than feared'. Q1 earnings didn't fall off a cliff. Single digit growth (top and bottom line) was largely cheered - which highlights how low expectations were. Next week eyes turn to the Fed. The market has priced in a 25 bps hike for May - but will it be a 'dovish' hike - where they offer language to suggest a pause in June? Or will they say "there's more work to do"?
Banks Surge on Earnings…JP Morgan kicked off Q1 '23 earnings season with a record beat. The US' largest bank by assets saw strong deposit inflows as it raised its guidance for net interest income. The question is how will regional banks report? It's likely to be a different story. Meanwhile we had a host of important economic data this week - showing inflation is cooling (albeit very slowly) and the economy is stalling. But there was little which will stop the Fed raising rates by 25 bps May 2nd...
Pop then Drop! Green Light for Fed HikeInvestors cheered the news of a slightly lower than expected CPI print from March. However, Core Inflation exceeded expectations and actually increased. That's important - as that's what the Fed are focused on. Here's the thing: with Core inflation running at 5.6% YoY - don't expect cuts anytime soon. It's almost 3x the Fed's target. Yes inflation is cooling - slowly - but not where the Fed need it to be. From mine, you can lock in another 25 bps for May 2nd. Bond markets see that. Equities are yet to get the memo
A Great Quarter… Can it Continue?The S&P 500 recorded an impressive gain of ~7% for the first quarter. Optimistic on the resolution of the banking crisis - and prospects of Fed rate cuts in the second half - the bulls have regained their mojo. But this raises a question: why would the Fed cut rates? It's not because inflation is under control. For example, could it be because the economy needs assistance? Stress in the financial system? A credit event? If so, is that a good thing? Here I also look at the monthly chart - it deserves our attention.
Yield Curve: Recession Dead Ahead2-year bond yields are cratering. Rarely - if ever - have we seen them fall 150 basis points in just three weeks. This signals the bond market sees aggressively rate cuts from the Fed this year. But what would cause this? A recession? Some kind of credit crisis? I can tell you it won't be because inflation is back to the Fed's target of 2%. What's more, the yield curve has steepened sharply. This isn't good... and if history is any guide... a recession is likely within 12 months.
Market vs The FedThere 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.
