Stocks sold off in the wake of a strict and unfriendly Fed yesterday as bond yields hit multi-year highs. Weekly jobless claims continue to show strength in the labor market and that is worrisome to the Fed… and to the stock market.
What do YOU think? I know that it’s hard to fathom, but the Federal Reserve works for you, the taxpayer. I know that it has its mandate of keeping inflation under control and unemployment low, but it does all that for us… to keep us happy, productive, and in business. Now, the bankers are not always loved by all. Presidents – some far more than others – have been known to cast a stone or two at the Fed. Everyone wants easy money and who doesn’t want to serve as the President during a time of easy money and stock market prosperity? If you are the President of the United States, microphones are all pointed at you when you speak, and that provides countless opportunities to say things in order to make things, like interest rate policy, go your way. But when a public figure calls for lower interest rates, they are not really talking to the Fed, but rather, to you. They want us to pressure the Fed into doing their bidding. “Wait,” you’re thinking, “they want US, as in you and I, to pressure the Fed?” Yep.
The Fed doesn’t have an easy job. On the surface it appears that it must simply move small weights from one side of a scale (inflation) to the other (employment) and maintain a constant balance, but of course, it is not that simple. Think about it. The Fed moves its key lending rate up to slow inflation, and down to spur economic growth, but what key rate are we talking about? The Fed Funds rate, of course. The Fed Funds rate is the overnight lending rate between banks, so unless you are a bank, you should probably not apply. The Fed’s real power over the economy comes from its relationship with us, and like all relationships, it is… well, complicated. The Fed cannot just make demands and tell us to stop spending money. On the flip side, the Fed cannot just tell us to be happy. Try this in your personal relationship and see how that goes. Actually, please don’t because it will be futile, and it may even set your relationship back. Now, like all relationships, there are subtleties that cannot be ignored. There are gives and takes, suggestions and inuendoes, there is soft-selling, and above all, timing is everything. The Fed must accomplish this with all the folks in the US, across all walks of life, red states, blue states, urban, suburban, x-urban (it’s actually a thing), rural, and don’t forget our trading partners. I am sure you get the picture. How does it accomplish this in real life?
I write a lot about body language and Fed speakers. I also put heavy focus on official Fed releases like Dot Plots and projections. I do this because that is the front line on its relationship with us. If the Fed simply raised the Fed Funds rates to 4.5% last November, there would have been utter chaos in the markets… and even the streets. Now, it began to suggest that higher rates may be appropriate to tackle the uptick in inflation. Even that subtle hint caused investors to cancel a long-running bull market. That message was also a subtle “stop spending, it is causing inflation.” There were numerous prods that followed. It took 4 months or so before the public was “on board” and ready to handle a tangible rate hike. The Fed tested the waters with a single +25 basis-point hike in March, but it certainly knew that more would have to come, but not before WE were ready. Dot plots slowly rose, and rhetoric was turned up, and expectations for more hikes were socialized. Soon, expectations for a larger, unprecedented hike began to socialize… and was expected. The Fed did what the markets were expecting with the first +50 basis-point hike since Y2K. But it could not let up. The unspoken message: “please stop spending.” Soon a +75 basis-point hike was socialized and accepted. That would be the first since 1994! No way! Yes way, it happened, in June, but not before the market, aka you and I, were expecting it… or rather accepting it. The unspoken message “stop spending, now.” How about another +75 basis-point hike? Back in early July, still reeling from the last jumbo hike and market selloff, you would have thought that absurd. But we came around, and the Fed answered our call by hiking once again in July… another +75 basis points. The unspoken message: “read my lips, STOP SPENDING.” Ok, we took our medicine, surely the Fed was ready to slow down, and the next FOMC meeting would not be until September. This optimism, unfounded, allowed markets to recover in late July and early August. But unfortunately, the Fed was far from done. Patience paid off for the Fed as not terrible, but still threatening, economic numbers began to change attitudes in late August, and finally a very hawkish speech brough the public to expect… accept another +75 basis-point hike, which the Fed happily delivered on just a few days ago. The unspoken message: “stop $*#&*@ SPENDING!” Do you think the Fed is satisfied? The hawk talk continued in the post-announcement Fed briefing. Markets have already factored in another +50 basis-point hike in November with an 86% chance of a +75 basis-point bump. That will, of course change in the coming weeks leading up to the next meeting. Which direction and how much… will be up to you and me. At some point in the future the Fed will once again start sending us unspoken and subtle messages of “be happy”… but not until we stop spending and inflation eases.
Bond yields rocketed higher in the wake of Wednesday’s announced rate hike pressuring stocks lower. The S&P500 fell by -0.84%, the Dow Jones Industrial Average gave up -0.35%, the Nasdaq Composite Index traded lower by -1.27%, and the Russell 2000 Index dropped by -2.26%. Bonds fell and 10-year Treasury Note yields jumped by +18 basis points to 3.71%. Cryptos gained +1.41% and Bitcoin climbed by +1.70%.
- S&P Global flash Manufacturing PMI (September) is expected to have fallen to 51.0 from 51.5
- S&P Global flash Services PMI (September) may have risen to 45.5 from 43.7.
- Next week: we will get more housing numbers, Durable Goods Orders, Conference Board Consumer Confidence, Personal Income/Spending, GDP, PCE Deflator, and University of Michigan Sentiment. Please check in on Monday for calendars and details.
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