Is The Fed Playing A Game of Cat-And-Mouse?
The Fed continues to play games with regard to future rate hikes, or the lack thereof. This week, Fed Chairman Powell alone minced words providing little direction on interest rates.
The inspiration for this week's musings is the 2001 movie, "Spy Game." In this author's humble opinion, next to last year's "Top Gun: Maverick," this is one of the best films to come out of Hollywood over the past two decades. Here's some trivia about the movie:
The film did well at the box office, earning $143 million worldwide, but the high salaries of the top stars caused the budget to exceed $100 million.
Tony Scott, who coincidentally filmed the original "Top Gun," directed this movie. Speaking of budget, Scott asked the studio for more money to use helicopters in a rooftop scene to show various views of the actors. The studio refused, so Scott rented the helicopters with his own money.
Brad Pitt, who was excellent in this movie, turned down the lead role in "The Bourne Identity" in order to star in this film. That appears to have been a mistake as Matt Damon when on to play the role of Jason Bourne in 4 movies in that franchise.
Here's what we've seen so far this week...
More Misdirection. Some of the most enjoyable scenes from "Spy Game" involve the back-and-forth between Nathan Muir (Rober Redford) and Charles Harker (Stephen Dillane). At one point, Muir is trying to find out what Harker is up to in hanging Bishop (Brad Pitt) out to dry. He walks around the room and sees a pad that Harker has turned over in a feeble attempt to hide the operation (Code Name Sideshow) from view. Muir sees the writing and states, "You know, this would go a lot faster you guys if you would tell me something about the op. What's it called, Sideshow?" To which Harker asks, "What about it? How did you come by this information?" Muir responds, "Just stuff we learn in the field."
Right now, Fed futures have shifted to a 98% probability of no rate hike next month and moved to a 74% probability of no rate hike in December. But, for the first time, there is at least a 1% probability of a rate cut in both November and December. Apparently, though Powell's comments affected equities, it hasn't prevented the smart money from thinking rate hikes are done. This week, Powell stated that the Fed will "proceed carefully" with regard to future policy. He acknowledged on one hand that financial conditions have "significantly tightened," yet on the other hand that the economy "is very resilient." Which one is it, Mr. Chairman? He stated that he does not fell like policy is "too tight,' but also acknowledged rising bond yields has caught their eye. The double-speak is intentional and hilarious at the same time.
The 30-year mortgage rate is fastly-approaching 8%, which would be the first time since August of 2000. The 10-year Treasury yield is approaching 5%, which would also be the first time since July of 2000. This is a concern for markets as consumers may be getting priced out of homes and other types of loans. The Fed is playing a dangerous game and may end up going the way of Mr. Harker if they fail to recognize that investors are watching.
Sometimes, More Analysis Is Needed. At one point in the movie, Tom (Pitt) hands Muir (Redford) a gift. The following exchange takes place:
Bishop: "Happy Birthday, Nathan. Did you know Langley has seven different birth date for you?"
Muir: "And they're all wrong."
Bishop: "Yeah, I know, believe me, it wasn't easy. KGB, Mossad, also wrong. Fortunately, I was well-trained."
Retail Sales were up more than expected in September (+0.7% vs +0.3%) and the year-over-year number was higher for the 3rd consecutive month. The trend since the middle of the year has been higher for consumer spending. In addition, the Redbook Sales year-over-year were higher than the previous week and were the 2nd highest reading this year. Mr. Powell is right about one thing, the economy still resilient. But, for how long?
Initial Jobless Claims were down more than forecast (198,000 vs 212,000 expected). In fact, it was the lowest reading since March of this year. the economic picture is still not showing signs of recession just yet. However, the concern is that the picture will change if rates stay elevated for too much longer. Next week will be a big week as Corporate Buybacks pick back up after the blackout period and GDP, Personal Spending, with the PCE Price Index will be released. It will be the final week before the next Fed meeting, so multiple Fed speakers will be closely watched.
Here's the famous roof scene shot by multiple helicopters....
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