All chips on the table

Playing chicken. Warning: scenes of my suburban childhood in the early 1970s may be offensive… read on if you dare. My best buddy who lived 2 doors down from me while growing up had a taste for… fun. He was always the first one to scurry over a fence or scale a tree to the top. He was a master at finding secret hideouts in the woods. His skills in those areas far outpaced mine. In those days, without video games, special activities, and smartphones, we were on our own to find creative ways to pass the time between school and dinner. We were armed with, simply, a bicycle, an old tennis ball, and a jack knife. That’s right, a jack knife, a common thing to carry for a young boy in those days. Don’t worry, it was only used to carve sticks and cut Twinkies in half; it was barely sharp enough to even do those effectively. My friend had one from boy scouts and I inherited one from a family member who brought it from Europe. One day, my fun-seeking friend thought it would be a good idea to play a game of chicken, using our pocketknives. He explained that we would each take turns throwing our knives at each other’s feet and see who flinched first.

Yesterday, the Fed decided to hold rates steady for now. This should not surprise you as the markets have been signaling a pause for some time. Further, overnight swaps markets were factoring in a less than 50% chance of any more hikes in this current cycle. The Fed also released its quarterly forecast in which it raised its projection for GDP, lowered its estimate for inflation, pulled back its assessment of yearend inflation, and eased its expectation for the unemployment rate – so far so good, right – BUT it signaled another +25 basis-point bump for the year and a higher Fed Funds rate for the end of next year. What does that exactly all mean? The Fed thinks the economy is doing well but inflation is still too high, so it may raise rates a bit more and keep them higher for longer. The market’s initial response to the news was somewhat mixed. In reality, none of it should be surprising given recent economic numbers and Fed rhetoric. Speaking of that, we got a small dose of that in Powell’s press conference after the release. He and his Fed-friends are committed to continuing the fight against inflation and if it has a negative effect on the economy… well, that will be the cost of having a more stable economy in the future. The market didn’t like that. Powell also said that the Fed is focused on a soft landing. The past two sentences are directly opposite, I know, but I just report the stuff. Are you confused? The Fed is also confused over why the economy is doing so well, and Powell said as much using that very adjective. If the Fed is confused over the economy, I get a bit anxious, and so does the market. So, what were we left with, ultimately? Lots of ambiguity on the future path of rates, sorry. However, if you filter out all the unnecessary words and implications, one gets a sense that the Fed is going to press its luck until the economy breaks and hope to ease just in time to avoid a disaster.

I reluctantly agreed to go along with the proposed game with my friend. We drew our weapons and stared each other down. My friend would throw first, and I decided not to move, because I knew that he would never intentionally aim his throw at my foot. He raised his arm and threw. The knife went straight into the front of my muddy Converse sneaker as we both looked at each other with utter surprise. My friend was surprised that he hit my foot… … … and I was surprised that the knife went between my toes and literally missed my big toe by millimeters. Looking back on that TRUE story, I realize that my logic not to move was solid but my mistake… was assuming that my friend had good enough aim to miss my foot. We know that the Fed would not intentionally put the economy into a recession, however, we can’t assume that it has the skill to do that. After all, it has a history of missing. I am still friends with my neighbor until this day… he is still crazy, but I love him all the same.

WHAT’S ON EDGE THIS MORNING

Broadcom Inc (AVGO) shares are lower by -6.81% in the premarket after a report surfaced that Google has considered dropping Broadcom as an AI chip supplier in favor of homegrown chips in order to save billions of dollars. Both companies declined to comment on the report. Dividend yield: 2.21%. Potential average analyst target upside: +15.9%.

FedEx Corp (FDX) shares are higher by +4.66% in the premarket after it beat EPS estimates by +22.00%. The company further hiked the low end of its full-year guidance above analyst estimates. Dividend yield: 2.01%. Potential average analyst target upside: +11.7%.

YESTERDAY’S MARKETS

NEXT UP

• Initial Jobless Claims (Sept 16) is expected to have risen to 225k from 220k.
• Existing Home Sales (August) may have increased by +0.7% after falling by -2.2% in the prior month.
• Leading Economic Index (August) is expected to have declined by -0.5% after slipping by -0.4% in July.