Thoughts From The Divide: High Times and Happy Endings

“I think it was the right decision, and I think it should send a signal that we, that we’re committed to coming up with a good outcome here” There is no verse in scripture that says “blessed be the dovish, for they shall fatten the sacred bull”. More’s the pity, because it would have been apt. James Macintosh seems to have noticed the same, but framed it slightly differently. Nothing says I love you to asset markets more than Fed rate cuts: the original PCA factor. And to be fair, the admiration appears to be mutual: Powell loves markets and markets love Powell. It’s nice to get positive feedback and it’s not like JP had to drag everyone screaming and kicking.
BY JON WEBB

MI2 Partners

Sep 27, 2024

“I think it was the right decision, and I think it should send a signal that we, that we’re committed to coming up with a good outcome here”

There is no verse in scripture that says “blessed be the dovish, for they shall fatten the sacred bull”. More’s the pity, because it would have been apt. James Macintosh seems to have noticed the same, but framed it slightly differently. Nothing says I love you to asset markets more than Fed rate cuts: the original PCA factor. And to be fair, the admiration appears to be mutual: Powell loves markets and markets love Powell. It’s nice to get positive feedback and it’s not like JP had to drag everyone screaming and kicking.

Powell recalibrated everyone’s Fed “reaction function”, and markets repriced to reflect it. Gold hit a new ATH (gratifying), as did S&P and Dow, and EM took off as the dollar stumbled. But while the prevailing direction for risk assets is higher, long-end bonds stalled, suggesting concerns about the Fed’s inflation-fighting credentials. As BobUnlimited put it, Fed policy could be described as “Over Easy”.

Of course, Powell was not the only factor driving risk higher. It must have helped that China signalled a sweeping stimulus package (and its intention to tap bond markets to pay for some of it). Naturally, this boosted Chinese stocks, which look very cheap compared to global stocks and have some prominent supporters, although cynics will say when they tell you they like them they are probably sellers.

Of course, there are always people who insist on looking at the downside of anything. In the case of the US economy, this means the Labour market, and whether we are on the brink of a dramatic deterioration in employment, which would vindicate Powell’s decisiveness. Anna Wong suggested a 70% chance the US economy was headed to recession, and Parker Ross gave an excellent summary of why many think unemployment is on the brink of surging higher. Consider @BobEUnlimited one of the optimists. But if Bob is wrong, there is every chance Powell will do what it takes to ensure the happiest ending he can. That’s what he told us and that’s why markets are pricing what they price. What could possibly go wrong?

https://www.gocomics.com/calvinandhobbes/1986/12/20

 Get 2 months free of MI2’s cutting-edge global macro research! Stay ahead of market trends with expert insights and actionable strategies.

Sign Up Here

Other posts

Thoughts From The Divide: The Vital Few

BY JON WEBB
Winston Churchill said the above line in a speech delivered in 1940 to the House of Commons, noting in his survey of the war efforts that “The gratitude of every home in our Island… goes out to the British airmen who, undaunted by odds, unwearied in their constant challenge and mortal danger are turning the tide of the world war”. While we don’t want to focus this week on the “psalm of swords” (though we would note Denmark’s government may have broken the first rule of Fight Club in recommending its citizens stock up on water, food, medicine, and iodine tablets!), the British Bulldog’s words are particularly apt at the moment given so much of the economic landscape is dependent on “the vital few”. Read more →

NDR Dynamic Allocation Strategy October 2024 Update

BY BRIAN SANBORN
Dynamic Allocation Strategy, indicators, weightings update Read more →

Thoughts From The Divide: Lack of Action

BY JON WEBB
It’s another week of heavy-hitting inflation data, with PPI coming in hotter than expected, CPI was in line with expectations on a year-on-year basis, and import prices “rose by the most in two years in April amid rising costs for energy products and other goods”. Under the hood, both CPI and import prices showed additional signs of running hot, with the latter featuring an upwardly revised 0.6% month-on-month change in March, and the CPI data, including hot readings in some of the niches and metrics followed by Powell et al., such as the  4.0% annualized reading in six-month Core CPI and a sobering 6.0% annualized reading in six-month Core Services. Read more →
Back to all posts →