We discuss: How markets took FOMC hawkish last week, but we think the key is still inflation, which is on a glidepath lower. Historical study suggests stocks could perform well in Q4 based on price action this year.
Please click below to view today’s Macro Minute (Duration: 9:06).
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Last week was a central bank-intensive week, with policy decisions coming from major central banks including the Fed, Bank of England, and Bank of Japan. Volatility was primarily centralized around Wednesday’s FOMC decision with the S&P 500 falling 2.8% and US 10 Year surging since Wed as markets digested a “more hawkish” 2024 SEP than originally anticipated. Data from EPFR shows equities had their largest outflow of 2023 last week, underscoring the “vortex of pain” investors are currently in. We are of the belief that the “Fed Higher for Longer” has less to do with inflation and more to do with “higher GDP” aka a stronger economy. Thus, we see this selloff post-FOMC as an overaction. At the end of the day, the Fed operates under a dual mandate: maximum employment and price stability, so we question whether the growth of Real GDP will be a concern for the Fed. The Fed’s primary focus will be inflation, and we see forward inflation continuing on a glidepath lower. This is one of several reasons that keeps us constructive through year-end.
- There is a slate of economic data this week that will influence markets, but of these, the most important, in our view, is the August PCE.
– 9/26 9:00 AM Case Shiller Home Price index <– Important update on housing conditions
– 9/26 10:00 AM Conf Board Confidence/Inf Expectations <– Hopeful for “tame” expectations
– 9/28 8:30 AM GDP <– Bears watching as Fed Cited in FOMC
– 9/29 9:30 AM PCE <– Street looking for 0.20 Core MoM
– 9/29 10:00 AM UMich Inflation expectations <– important to see how rise in gasoline impacts expectations - The market has been under tremendous pressure since the start of September. The rise in yields has particularly hurt equities as the US 10 year hit a local peak of 4.5% since last Thursday. We see this rise in interest rates as more of a reaction to policy decisions from major central banks over the past few weeks.
- We have outlined the response from equities and yields post central bank decisions below:
– Firstly, the ECB added 25 bps, BUT signaled the end of its hiking cycle <- stocks initially took this positively, but fell the next day
– The Fed “paused,” BUT released a relatively “hawkish” (as interpreted by consensus) SEP for 2024 <– Stocks fell and rates surged
– The BoE paused for the first time since YE 2021 <– stocks continued to fall, and the US 10Y yield pressed to 17-year highs of >4.5%
– The BoJ decided to maintain its “ultra-loose monetary policy” BUT is mindful of the “extremely high uncertainties” with its economy <– stocks attempted to claw back losses endured over the week, but subsequently ended negative by Friday’s close
– See the “vortex of pain” investors are currently in? The selling has been relentless. - As for our view, we believe the bigger picture of Fed Policy has not materially changed. Per Chair Powell, the Fed’s SEP is just an accumulation of individual forecasts from 19 FOMC members. And even if the Fed had a crystal ball, they actually lowered the YE2023 Core PCE estimate and left YE 2024 core PCE estimates unchanged. This underscores the substantial progress made on inflation since the last SEP.
- The higher real GDP growth pushed the FOMC’s policy rate forecast 50bps higher (2 less cuts). We question, does higher real GDP growth (aka stronger economy) also mean a recession will be avoided? Or does the market prefer a lower Fed funds rate at the cost of an economic contraction? Powell actually answered this.
– Q: If GDP keeps coming in hot, even in the absence of inflation resurgence, would that, on its own, be a reason to consider more tightening?
– A: …GDP is not a mandate…The question will be … is the heat that we see in GDP really a threat to our ability to get back to 2 percent inflation? … It’s not a question about GDP on its own.
– So, in other words, the battleground remains inflation. - Many are focusing on the Fed FOMC. But another factor last week was the release of the Fed balance sheet.
– Last week the Fed reduced its balance sheet by $75B, its largest weekly decline since QT started
On the asset side:
– $48B of the reduction was due to the repayment of the Regional-bank induced Bridge Loans
– $26B of the reduction was due to the selling of treasuries and MBS holdings
On the liability side:
– Reverse repo was reduced by $41B
– Bank reserves were reduced by $166B
– TGA balance was up by $124B
– So to us, the quantitative tightening operation also could have partially contributed to the selloff in treasuries (rise in yield). - As we approach the end of September, near-term headline risks loom.
– ongoing UAW strike
– Potential government shutdown
– These are not “fundamental-changing” to the stock market, but are important to monitor given markets have been “fragile” these past few months - This tweet caught our eye over the weekend that showed:
– Since 1950, when the S&P 500 is up >10% Jan thru July (similar to this year)
– But is negative from Jul End Thru Sep 23 (similar to this year)
– 4Q performance tends to be strong.
– Of the 8 instances, stocks on average finished up 7-8% in 4Q
– With a stunning 100% win ratio.
– So quite constructive to us
BOTTOM LINE: Despite headline risks in the near-term, we remain constructive through year-end as inflation remains key and we believe it is on a glidepath lower.
Chair Powell even confirmed in the presser that “a soft landing is a primary objective”, so the Fed really doesn’t need to break the economy if inflation is on the right track. And even though markets have endured weakness these past few months, historical corollaries suggest gains are possible in 4Q.
Key incoming data September
9/1 8:30am ET August Jobs ReportTame9/1 10am ET August ISM ManufacturingTame9/6 10am ET August ISM ServicesMixed9/6 2pm ET Fed releases Beige BookTame9/8 9am ET Manheim Used Vehicle Index August FinalTame9/8 2Q23 Fed Flow of Funds ReportTame-
9/13 8:30am ET August CPIMixed -
9/14 8:30am ET August PPITame -
9/15 8:30am ET September Empire Manufacturing SurveyTame 9/15 10am ET U. Mich. September prelim 1-yr inflationTame-
9/18 8:30am ET September New York Fed Business Activity SurveyTame -
9/18 10am ET September NAHB Housing Market IndexTame 9/19 9am ET Manheim September Mid-Month Used Vehicle Value IndexMixed9/20 2pm ET September FOMC rates decisionMarket saw Hawkish-
9/21 8:30am ET September Philly Fed Business Outlook SurveyMixed -
9/22 9:45am ET S&P Global PMI September PrelimTame - 9/25 10:30am ET Dallas Fed September Manufacturing Activity Survey
- 9/26 9am ET July S&P CoreLogic CS home price
- 9/26 10am ET September Conference Board Consumer Confidence
Key incoming data August
8/1 10am ET July ISM ManufacturingTame8/1 10am ET JOLTS Job Openings JunTame8/2 8:15am ADP National Employment ReportHot8/3 10am ET July ISM ServicesTame8/4 8:30am ET July Jobs reportTame8/7 11am ET Manheim Used Vehicle Index July FinalTame8/10 8:30am ET July CPITame8/11 8:30am ET July PPITame8/11 10am ET U. Mich. July prelim 1-yr inflationTame8/11 Atlanta Fed Wage Tracker JulyTame8/15 8:30am ET Aug Empire Manufacturing SurveyMixed8/15 10am ET Aug NAHB Housing Market IndexTame8/16 8:30am ET Aug New York Fed Business Activity SurveyNeutral8/16 2pm ET FOMC MinutesMixed8/17 8:30am ET Aug Philly Fed Business Outlook SurveyPositive8/17 Manheim Aug Mid-Month Used Vehicle Value IndexTame8/23 9:45am ET S&P Global PMI Aug PrelimWeak8/25 10am ET Aug Final U Mich 1-yr inflationMixed8/28 10:30am ET Dallas Fed Aug Manufacturing Activity SurveyTame8/29 9am ET June S&P CoreLogic CS home priceTame8/29 10am ET Aug Conference Board Consumer ConfidenceTame8/29 10 am ET Jul JOLTSTame8/31 8:30am ET July PCETame
Key incoming data July
7/3 10am ET June ISM ManufacturingTame7/6 8:15am ADP National Employment ReportHot7/6 10am ET June ISM ServicesTame7/6 10 am ET May JOLTSTame7/7 8:30am ET June Jobs reportMixed7/10 11am ET Manheim Used Vehicle Index June FinalTame7/12 8:30am ET June CPITame7/13 8:30am ET June PPITame7/13 Atlanta Fed Wage Tracker JuneTame7/14 10am ET U. Mich. June prelim 1-yr inflationMixed7/17 8:30am July Empire Manufacturing Survey7/18 8:30am July New York Fed Business Activity Survey7/18 10am July NAHB Housing Market Indexin-line7/18 Manheim July Mid-Month Used Vehicle Value IndexTame7/25 9am ET May S&P CoreLogic CS home priceTame7/25 10am ET July Conference Board Consumer ConfidenceTame7/26 2pm ET July FOMC rates decisionTame7/28 8:30am ET June PCETame7/28 8:30am ET 2Q ECI Employment Cost IndexTame7/28 10am ET July Final U Mich 1-yr inflationTame
Key data from June
6/1 10am ET May ISM ManufacturingTame6/2 8:30am ET May Jobs reportTame6/5 10am ET May ISM ServicesTame6/7 Manheim Used Vehicle Value Index MayTame6/9 Atlanta Fed Wage Tracker AprilTame6/13 8:30am ET May CPITame6/14 8:30am ET May PPITame6/14 2pm ET April FOMC rates decisionTame6/16 10am ET U. Mich. May prelim 1-yr inflationTame6/27 9am ET April S&P CoreLogic CS home priceTame6/27 10am ET June Conference Board Consumer ConfidenceTame6/30 8:30am ET May PCETame6/30 10am ET June Final U Mich 1-yr inflationTame
Key data from May
5/1 10am ET April ISM Manufacturing (PMIs turn up)Positive inflection5/2 10am ET Mar JOLTSSofter than consensus5/3 10am ET April ISM ServicesTame5/3 2pm Fed May FOMC rates decisionDovish5/5 8:30am ET April Jobs reportTame5/5 Manheim Used Vehicle Value Index AprilTame5/8 2pm ET April 2023 Senior Loan Officer Opinion SurveyBetter than feared5/10 8:30am ET April CPITame5/11 8:30am ET April PPITame5/12 10am ET U. Mich. April prelim 1-yr inflationTame5/12 Atlanta Fed Wage Tracker AprilTame5/24 2pm ET May FOMC minutesDovish5/26 8:30am ET PCE AprilTame5/26 10am ET U. Mich. April final 1-yr inflationTame5/31 10am ET JOLTS April job openings
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