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?"

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"

What's The Right 'Neutral' Interest Rate?

Will last Friday’s August jobs report showing that wages rose nearly 3% compared to a year ago finally convince the Federal Reserve that inflation really is starting to pick up steam? If not, what exactly will it take?

That report was certainly good news for workers, who have waited a long time – since 2009, apparently – to see their wages rise by so much. But it also provides convincing evidence that 2% inflation – which the Fed has been trying to stoke for the past 10 years – has finally arrived. But will the Fed actually believe it and do something before it “overheats,” to use its word?

A hike in the federal funds rate to 2.25% at the Fed’s September 25-26 monetary policy seems like it’s already baked in the cake. But it’s still not a given that another one will happen at the December meeting. According to CME’s Market Watch tool, the odds of a rate hike at the yearend confab are only 72%, compared to more than 98% for this month’s meeting. (While the Fed does meet in early November – just a day after the “most important election in our nation’s history,” if you believe some of the political pundits – a rate change then is very unlikely. The Fed has indicated that it will only adjust rates at a meeting that ends with a press conference by the Fed chair. That pretty much disqualifies November).

After the jobs report was released, the yield on the two-year Treasury note hit 2.70%, its highest level in more than 10 years. The benchmark 10-year note closed last week at 2.94%, its highest point in over a month. That those rates didn’t go even higher seems to indicate that the market isn’t yet sold on two more rate increases this year.

At least one member of the Fed is. Continue reading "What's The Right 'Neutral' Interest Rate?"