What Do The Macros Tell Us About The Market?

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When the macros make the market in energy and stay way out ahead of the U.S. Fed!

This week’s attention has been almost entirely on the U.S. Federal Reserve and raising the Discount Rate by 50 basis points. The Fed’s charge is to bring inflation back in line with the goals of a stable market. The problem is this, when the actions of the FED are either too weak or too late, when they finally do act, it may be ill-timed at the very least, if not outright wrong.

Over the last few weeks, we have seen the GDP turn negative at -1.4%. We saw the Consumer Price Index come in at an 8.5% rate, year over year, and we got the Producer Price Index came in at a 40-year high of +11.2%.

These macros alone showed the markets just how far U.S. inflation had gotten out of control. No matter how much the Fed, or the Treasury Secretary, said the word “Transitory,” they just couldn’t fool markets back into line. It takes action. The macros tell us the FED action is “too little and too late.” Continue reading "What Do The Macros Tell Us About The Market?"

Now It Begins, But How Will It End?

As expected, the Federal Reserve raised its target interest rate by 25 basis points last Wednesday, as Fed Chair Jerome Powell said two weeks ago that it would do. What was surprising was that the Fed also telegraphed that it plans to raise rates six more times this year, to at least 1.75% by the end of this year, and four times next year, with fed funds ending at around 2.75% by the end of 2023.

That was a lot more aggressive than some observers, including this one, had expected. Yet the market seemed happy with it. After a brief initial sell-off, stocks soon resumed their upward path, apparently because they liked the certainty it provided, at least for now, as well as the gradual nature of the Fed’s schedule.

But how certain can we be? Will the Fed really carry through with this, or will it revert to its easy-money ways? And even if it does do what it says it plans to do, will it be enough to get inflation under control while at the same time avoiding pushing the economy into recession?

We’ll have to wait and see. Continue reading "Now It Begins, But How Will It End?"

Powell To The Rescue, Yet Again

Over the past several years, Modern Monetary Theory has become de facto U.S. government economic policy. To refresh your memory, MMT posits that the government can spend as much money as it likes without worrying about how to pay for it because essentially, it owes the money to itself, plus it can simply print more money as needed. Since the 2008 global financial crisis, the U.S. has done that mainly through the Federal Reserve, which has seen its balance sheet balloon to $9 trillion as the national debt has swelled to $30 trillion.

The only constraint on government spending, according to MMT, is when inflation gets out of hand, at which time the government should impose tax increases and reestablish equilibrium. There doesn't appear to be any magic number for what constitutes worrisome inflation, but reasonable people surely believe we have already reached that point, which should mean that the time is right to start raising taxes.

Not surprisingly, recent converts to MMT only really like the first part of the theory since it gives the government license to spend freely and not have to worry about the consequences. Now, however, MMT is being put fully to the test; inflation is here.

As we have seen, though, there is absolutely no interest in Washington to raise taxes to fight inflation and pay for out-of-control spending. Instead, we are now beholden to the two people, namely President Biden and Fed chair Jerome Powell, most responsible for creating the inflationary pressures in the first place to stuff the inflationary genie back into the bottle. Can they do it? Continue reading "Powell To The Rescue, Yet Again"

Is The Powell Put dead? Maybe Not

Last week a bevy of Federal Reserve officials led by New York Fed President John Williams, "who is one of the most senior advisers to Chairman Jerome Powell and helps shape the policy agenda," in the words of the Wall Street Journal, tried to talk down the market's concern that the Fed is about to ratchet up interest rates aggressively, starting with a 50-basis point hike at its next meeting March 15-16.

"There's really no kind of compelling argument that you have to be faster right in the beginning" with rate increases, Williams said last Friday. "There's no need to do something 'extra' at the beginning of the process of liftoff. We can…steadily move up interest rates and reassess. I don't feel a need that we'd have to move really fast at the beginning."

The 50 bp talk got started by St. Louis Fed President James Bullard, who had said earlier that "the best response to this situation [meaning the recent surge in inflation to 40-year highs] is to front-load the removal of accommodation." That provoked a large selloff in the stock and bond markets. Subsequently, several Fed officials and regional bank presidents, including Williams, pushed back on that assessment, saying that the Fed would take a more measured approach to raising rates. The desired path now seems to be a 25-bp increase at the March meeting, following which the Fed would see what effect that would have before taking the next step. Continue reading "Is The Powell Put dead? Maybe Not"

Can A Dove Change Its Spots?

Thankfully, there is at least one area of U.S. society where people are still allowed to disagree, and that's on Wall Street, where there is a clear difference of opinion on what we can expect the Fed to do this year regarding raising interest rates to fight inflation. What's surprising is how widely divergent they are.

Let's start with the most aggressive, or hawkish, prediction. That belongs to Bank of America.

"Following the continued hawkish pivot at the January FOMC meeting, we expect the Fed to start tightening at the March 2022 meeting, raising rates by 25 basis points at every remaining meeting this year for a total of seven hikes, and in every quarter of 2023 for a total of four hikes," BofA economists said. That would put the fed funds target rate at a range of 1.75% to 2% by the end of this year and 2.75% to 3.00% by the end of next year when the bank expects the rate-raising cycle to end.

"The Fed has all but admitted that it is seriously behind the curve," the BofA research note added. "When you are behind in a race, you don't take water breaks," it said, explaining its aggressive forecast. Continue reading "Can A Dove Change Its Spots?"