Serious, threatening Fed talk

Stocks traded lower yesterday as the cacophony of hawkish Fed voices reminded us that they are really, really, really serious about tackling inflation. OPEC+ moves to lower production to prop up crude prices could be the next inflation fear driver for markets.

Don’t make me pull over. In a bygone era, I am sure that many of us as kids were threatened by a rightfully angry parent glaring at us in the rearview mirror menacing us with that “don’t make me pull over” threat. I myself, being a bit of a wise guy kid, was certainly the recipient of many similar well-deserved threats as I carried on with my siblings in the back seat of the car. Before I go any further, I need to tell you that my parents never actually pulled over and, of course, had no intention to do so. With no options left after repeatedly asking, cajoling, and even begging me to stop, my parents were left with no alternative but to use the time-honored threat. Most of the time… it worked, I would settle down and count the red cars.

These days the threat it’s more like “don’t make me take away your iPhone!” Most of today’s youngsters would view that as the ultimate threat, making it maximally effective. “Ok, Mark, why are you going through this,” you are thinking. I am bringing this up to underscore the value of expectations. We often talk about market expectations. Things like expected earnings, forward guidance, economic forecasts, interest rate predictions, possible geopolitical outcomes, etc. Those expectations, if met or exceeded often result in a thumbs up, and vice versa with a thumbs down for misses. Lately however, a new type of expectation rules the markets. It is the result of extreme distress brought on by extraordinary events. Think about the 2020 global COVID lockdowns resulting in economic and market meltdowns. It was an extreme, but markets managed to recover. A result of expectations about growth that would occur AFTER the lockdowns and the pandemic passed. It was powerful enough to spark and sustain an epic rally.

Today, we face a different threat in inflation. Not just any inflation, but the worst case of it since the 1980s. Come on, you know it is not good, but of course, you have hopes that it will get better soon. Not nervous enough about inflation? The Fed has decided to make it worse for us by raising interest rates, effectively increasing inflation to us consumers with hopes that we will slow down our demand. Those measures are already tangible in higher mortgage rates and other lending rates. But alas, inflation has not let up. Consumer demand is still… er, healthy. The labor market, while slowing, is still tight, so consumers remain confident enough to continue to purchase. This morning I heard about a report which relayed that polled consumers, faced with higher costs, would sooner lower their spending on food before cutting off streaming services like Netflix, Amazon Prime, Disney, etc. Consumption will simply not let up.

The Fed’s activity, intentionally slowing economic growth, has had its effects on the markets as well – I won’t get into the detail, because you know. It is only natural for optimists to begin to think about a time AFTER inflation is reigned in and the Fed will pivot on its policy. We have seen the results of those hopes in July’s rally and the most recent attempted rally late last week and earlier this week. This week, leading up to an important jobs number, the Fed has been out in full force with hawk talk. Not just any hawk talk either. Even historically dovish members have increased their hawkish rhetoric. The message is clear: any dreams of rate hike letup are worthless. The Fed is not going to stop hiking, and certainly not going to consider cutting rates until inflation is under control… regardless of market volatility. I can run you down the list of quotes from yesterday alone, but I don’t have to because the message is clear, and it is unified. The Fed has, at this point, asked, cajoled, and even begged us to stop… all to no avail. It has finally been left with no alternative but glare at us in the rearview mirror and threaten to take away more of our hard-earned savings. Today’s employment number is important, for sure, but next week’s Consumer Price Index / PPI will be a real test to see if the rate hikes and threats are working. Beyond that, we will have another FOMC meeting in just a few weeks. Now might be a good time to quietly look out the window and count the red cars.

YESTERDAY’S MARKETS

Stocks slipped yesterday after countless Fed members voiced their resolve on rate hiking to fight inflation. The S&P500 fell by -1.02%, the Dow Jones Industrial Average traded lower by -1.15%, the Nasdaq Composite Index slid by – 0.68%, and the Russell 2000 Index declined by -0.58%. Bonds declined and 10-Year Treasury Note yields rose by +7 basis points to 3.82%. Cryptos slipped by -0.12% and Bitcoin advanced by +0.31%.

NEXT UP

• Change in Nonfarm Payrolls (Sept) is expected to come in with a +255k gain, lower than August’s +315 increase.
• Unemployment Rate (Sept) may have remained constant at 3.7%.
• Fed speakers today: Kashkari, Williams, and Bostic.
• Next week: We will get import Consumer Price Index / CPI, Producer Price Index / PPI, Retail Sales, University of Michigan Sentiment, and FOMC meeting minutes. Check back in on Monday for calendars and details.