A briefcase full of hawkish papers

Stocks slipped yesterday as a parade of hawkish Fed speakers did their best to bring down the mood. Housing continues to feel the effects of the Fed’s tightening activities… but not all hope is lost.

Meaningless words. Well, those Fed bankers have certainly made a name for themselves in recent years. To be clear, the Chair is the most powerful banker in the world when it comes down to where the rubber meets the road in actual policy decisions. But those other 16 FOMC members have certainly found their voices to be effective, not unlike my daughter’s puppy Eloise, who has learned that her bark may be even more effective than her bite. There was a time, not so long ago (depending how old you are), that the FOMC was shrouded in mystery. Its communication was limited to official releases that were noisily tapped out on hundreds of teletypes in brokerage signal rooms and newsrooms around the world. We just went on with our business and when the Fed would raise or lower interest rates, markets… mostly bonds would adjust, and we would move on. Of course, banks adjusted their lending rates, which used to be considered a good thing (for the banks, of course) when they were going up and bad when they were receding. In the stock markets, most of the activity around Fed rate changes occurred in the utilities sector. Those stocks were, and still are for the most part, held for their stable, and often higher dividend yields. Most of them are government regulated and their revenues don’t fluctuate as much as in most other sectors. That makes them as similar to bonds as you can get… in the stock market. So, when rates went up utility stocks typically went down along with bonds. Ok, ok these are the capital markets we are talking about. Speculation is nothing new. Of course, there are speculators and investors looking to get a jump on any market moving news. However, unless your uncle was an FOMC member, you would have had no clue what those officials were up to. In fact, during Alan Greenspan’s tenure as Fed Chief, there was something known as the Briefcase Indicator. During times when the Fed was known to be deliberating on interest rates, the media would focus on his briefcase. If it was full, burgeoning with papers and the like, it was deduced that the Chair was gathering lots of evidence to convince his colleagues to raise interest rates. In other words, take profits in bonds and utility stocks if you wanted to get ahead of the teletypes.

Of course, these days are a bit different. If a Fed banker is caught carrying a briefcase, it is likely to be filled only with his or her lunch, as we now live in a digital world. Interest rate policy, in addition to electronic press releases, is read out on live TV and always (since Powell became the Chair) followed by a press conference in which the Chair is subjected to all manner of questioning and cross examining by the press. Today, we live in a sharing society in which it is not too difficult to find out what someone is doing or thinking. We simply Google the name of the Fed official and there is a good chance that we will find a quote, a Tweet, or even a family picture to inform you on the policy maker’s potential vote at the next meeting. In fact, you don’t even have to do that. You can simply check out my daily note’s NEXT UP section where I typically list daily Fed speakers. Yes, they speak, and more and more, they are saying whatever they want. No line toeing or company lines, today’s FOMC members share their views… often. Their words are always important, but they gain importance when we are at policy inflection points, LIKE WE ARE APPROACHING, at the moment. It is clear that Fed officials will soon have to let up on the brakes to avoid pushing the economy into a tailspin. Of course, everyone wants to know just how soon, so naturally, we are interested in the various opinions of Fed members. For now, the group seems united on the message that rates will continue to rise, but at some point, a dove or two will show their true colors and soften the narrative, which is precisely what the markets are looking for.

Indeed, these days, things are quite different than they were in the 1980s when the US economy was last gripped by such challenging inflation. Similarly, it is not just utility stocks which are so sensitive to rate policy. No, today, growth stocks are what everyone watches when the Fed is expected to make a move. Growth stocks have created significant wealth for investors over the past few decades. As such, they not only dominate investors’ psyches, but also the cap-weighted indexes. So, when James Bullard, the St. Louis Fed President makes a statement which implies that Fed Funds needs to peak at 5% - 7% to be sufficiently restrictive, growth stocks take a beating. You have probably never heard of James Bullard or may not even be able to pinpoint St. Louis on the map, but that city, just on the border of Illinois, west of Louisville Kentucky, east of Kansas City, on the mighty Mississippi river and its obscure central bank chief, impacted your portfolio yesterday. You didn’t have to wait for hours in your car hoping for a chance to watch him cross the street and snap photos of his briefcase. No, all you had to do was listen to him literally tell you what he thinks… at an event… in Louisville Kentucky, which is due west of St. Louis (in case you weren’t paying attention, earlier). It is important, however, to note that talk is just talk, and policy, though it can change between meetings, is likely only to change at FOMC meetings and is up to 12 voting members out of the 17 total membership. According to Fed Funds futures, there is a 100% chance of a +50 basis-point rate hike in next month's meeting, and rates will top out at around 5% sometime around June of next year. Not much changed on expected policy after Bullard’s comments. Stocks did initially fall, but they ultimately closed off their lows. Bullard is a well-known hawk… and he is currently a voting member.

YESTERDAY’S MARKETS

Stocks fell slightly yesterday in the wake of hawkish comments by Fed officials. The S&P500 fell by -0.31%, the Dow Jones Industrial Average slipped by -0.02%, the Nasdaq Composite Index declined by -0.35%, and the Russell 2000 Index dropped by -0.76%. Bonds slipped and 10-year Treasury Note yields gained +7 basis points to 3.76%. Cryptos lost -0.17% and Bitcoin inched higher by +0.90%.

NEXT UP

• Existing Home Sales (Oct) are expected to have fallen by -6.6% after pulling back by -1.5% last month.
• Leading Economic Index (Oct) may have declined by -0.40% for the second straight month.
• The week ahead:  data will be compacted into three days prior to the Thanksgiving Holiday and will include regional Fed reports, more housing data, flash PMIs, FOMC Minutes, and University of Michigan Sentiment. Earnings season continues to wind down but there are still plenty of market movers up next week. Check back on Monday for calendars and details.