Is this the pivot you were hoping for?

Stocks rocketed higher yesterday after Fed Chair Powell made some dovish comments. Stocks applauded Powell and bonds responded with a “meh” and adjusted ever so slightly.

A pivot with any other name is still a pivot. Think of the Fed on the front line in a pitch battle with inflation. The skies above are grey with clouds and smoke. The temperature can be described as not cold enough for winter but too cold for autumn, as a steady wind from the North bites at the cheek. The ground below is muddy and there is nowhere for rainwater to go. The stench of excess permeates the air. The senior ranking officer, Chairman Powell, checks and rechecks his orders. There is no way to misinterpret his charge. He is on his own. “Fight inflation with haste,” reads the order. Powell, “Jay” as his brothers and sisters in arms call him, neatly folds the now ragged paper, and as he goes to place the packet in his breast pocket, he notices some writing on the back of the page, but in small untidy writing, and it reads “try not to get everyone fired.” He didn’t notice that order in the past 100 or so times he unfurled and re-folded the note. This concerned him and his first thought is to radio headquarters for clarification, but he cannot. He is on his own. He straightens his dust-laden coat and draws his saber. He looks left and sees his mortar batteries perfectly hewn with rows of mortar rockets neatly lined up. They are all manned by the very-committed “doves battalion.” He nods. He looks right and marvels at the rows of large cannons, all seemingly pointed at the same target. In all his years in service of country he has not witnessed such a massive lineup of artillery. But then again, he has never fought against such a formidable foe. The “big guns,” as they like to call them, are manned by “hawk company,” known for their fierce fighting attitude. Their motto is “win at all costs!” Powell raises his blade slowly and surely. All eyes are on his raised weapon as he swoops it down and shouts “FIRE!” That was last March.

The shelling lasted for several months without stopping. The skies are now seemingly pitch-black with smoke from the months-long cannonade. The enemy lines are far from eyeshot and Powell raises his binoculars to his eyes and levels them to spy across the now-decimated field. He can make out very little, but it appears that some of the barrage had met its mark. He remembers the small writing on his orders which he had plied over many thousands of times since he first noticed them. He repeated the words under his breath. “Try not to get everyone fired.” Upon this, he decided that it might be appropriate to rest 1/3 of his big guns to allow the smoke to clear and provide him with an opportunity to gather some intel on his progress. His orders to the “hawk company” commander St. Louis Fed President James Bullard read as follows: “It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation [the enemy] down.” Bullard shoots his skipper a puzzled look, but Powell assures that winning will “require holding policy at a restrictive level for some time,” calming Bullard’s apprehensions. The cease fire order is not yet officially given, it will be discussed by all the gunners in a meeting, a war council of sorts, to be held in 2 weeks. Powell, being the senior ranking officer, is likely to prevail, after which several of the big guns will be silenced until further notice.

Is the battle over? Absolutely, positively not. The enemy, inflation, still appears to be thriving despite the vicious bombardment. This morning however, we will get some intel in the form of the PCE Deflator. Powell is hoping that it will show that core inflation slowed to +5.0%, a number that was once comfortably at or below +2%. That would show progress and justify slowing the pace of the offensive. ISM Manufacturing will also arrive this morning and give Powell an idea of just how effective his bombardment has been. It may come in at 49.7 which would mean that manufacturing is contracting, a potential sign of recession. Minor collateral damage, but Powell will be concerned that collateral damage will build up beyond his control. He knows that the decisions he makes over the next few months will be the most difficult of his career. He knows that some of his predecessors prematurely called for a full ceasefire before the enemy was fully put down only to witness the enemy regroup to mount a vicious counterattack.

Is this the pivot we were hoping for? To be clear, the Fed is far from finished in its work. Inflation is still high and according to futures, the market is still expecting the Fed to raise rates by almost another full percentage point before summer sets in. The cannons will continue to ring, albeit with less fury. Sometime in late summer, the gunning is expected to cease and the battle-hardened cannoneers will walk across the battlefield and begin to reconstruct and mend the damage of their once red-hot artillery pieces.

YESTERDAY’S MARKETS

Stocks rose with exuberance after Powell hinted of slowing rate hikes. The S&P500 climbed by +3.09%, the Dow Jones Industrial Average rose by +2.18%, the Nasdaq Composite jumped by +4.41%, and the Russell 2000 Index advanced by +2.72%. Bonds rose and 10-year Treasury note yields eased by -13 basis points to 3.60%. Cryptos gained +4.49% and Bitcoin added 3.91%.

NEXT UP

• Personal Income (Oct) is expected to have risen by +0.4%, same as September.
• Personal Spending (Oct) is expected to have increase by +0.8% after gaining by +0.6% in the month prior.
• PCE Deflator (Oct) may have eased to +6.0% from +6.2%. PAY CLOSE ATTENTION TO THIS RELEASE
• Initial Jobless Claims (November 26) is expected to come in at 235k, slightly lower than last week’s 240k claims.
• ISM Manufacturing (Nov) is expected to come in at 49.7, down from October’s 50.2.