Peter Tchir, Here is my latest take on markets, the economy, and the upcoming FOMC meeting:
- The economy is fragile and we could see a deep (nominal) recession this year. Key drivers would be the inventory build, housing, autos, and wealth destruction as described in more detail in Wake Me Up When September Ends.
- By the end of this year, deflation will be as big of a concern as inflation.
“When He opened the third seal, I heard the third living creature say, “Come and see.” So I looked, and behold, a black horse, and he who sat on it had a pair of scales in his hand.” Rev. 6:5
Nothing in the data (CPI) that came out this week changed my core view. If anything, some of the data and the comments from the FedEx CEO make me more convinced that we are in a precarious situation.
I don’t envy the Fed’s job as the Economy is Complex, but before getting to the awards, I feel obligated to give my opinion on the Fed Meeting:
- 75 bps is almost certain. 100 bps could be done in a “shock and awe” type of moment, but that seems unlikely. Maybe the Fed will realize that they’ve pushed too hard already and go with 50 bps, but that also seems unlikely (so, we are left with 75 bps). In any event, the size of the hike is the least interesting part of the meeting.
- Some “nod” to wait and see. Whether he will be hammering home data dependence, answering questions about the lag effects of policy, or addressing more concerns from people about the state of the economy, we could see Powell back down from the tough talk he and the rest of the Fed and central bankers across the globe have been giving us. It cannot be easy to tell an entire nation that you are prepared to sacrifice their jobs in the name of “inflation fighting” when many believe that inflation has peaked. Maybe not a pivot, but a little relief for the stock market bulls.
- Reshaping Quantitative Tightening. The mortgage market is in disarray (yields keep moving higher as Treasury yields go higher and spreads widen). The Fed does not have enough runoff in their mortgage portfolio to accomplish their stated QT goals and selling bonds into the open market seems problematic. So maybe we could see total QT remain the same, but the emphasis will be shifted to achieving this goal by using Treasuries that are maturing rather than mortgages. It seems like they’ve hinted at some issues and this would be a rational resolution as it would bring the balance sheet down with the least amount of impact to markets. This could be good for mortgages and maybe even for stocks, at least briefly.
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