Fed Wrong Again
Equities tried to rebound last week, but failed to hold on through Friday’s decline. Fixed income markets have been hit hard by rising rates, as the MOVE index (bond volatility) hit a 13-year high last week.
Equity markets are equally in disarray as the Fed maintains a hawkish stance. And yet, there is evidence the markets may be reaching a bottom. According to J.P. Morgan, market breadth and momentum have hit a signal that the market is close to bottom. When that signal is reached, while near-term downside is usually followed, the 4-week and 12-week periods after the signal is reached exhibit positive returns on average, +1.9% and +4.6% respectively.
The Fed is equally wrong on inflation now as they were last year. The Fed failed to act in 2021 to rising inflation, and yet, they seem equally determined to act hawkishly now even though there are clear signals that inflation has peaked. Gas prices have declined 25% since the June peak.
The Zillow Rent Index has declined 20% since February. When you look at the raw materials cost and the used car index, there are similar declines. If September’s PPI report comes out with a 3rd consecutive monthly decline and the year-over-year value drops below CPI, inflation will have peaked, making further rate hikes largely unnecessary. On top of that, this recession is not your grandmother’s recession. The U.S. consumer remains resilient, jobs are still in want, and equity outflows have not been on the same measure as previous recessions. Economists expect another good Jobs Report this week, which places the ball squarely in the Fed’s court as to whether or not to continue raising rates and risk deepening the recession.