Stocks traded lower Friday, but for some mega cap tech stocks which were unwilling to give up ground. Traders took a break after a busy week of whipping and driving, accentuated the directionless equities in Friday’s session.
And now… what. The Fed told us what it was thinking. If you missed it, FOMC members put their own forecasts out there, including where they thought Fed Funds policy would put the key interest rate by yearend. Economically speaking, the Fed raised its forecast for GDP up to +2.1% from +1.4%, Unemployment Rate down to 4.0% from 4.1%. and Core Inflation UP to +2.6% from +2.4%. All great except maybe inflation, right? That is a problem if a) you, like the rest of us, are trying to stick to a budget, and b) you, LIKE THE REST OF US, own lots of interest rate sensitive growth stocks. Fed cuts have been rally cry number 2 in the recent bullish binge in tech stocks… of course, behind rally cry number 1, AI. Given this information, one would surely conclude that the Fed would come out with some sort of bearish policy change, or at least some sort of hawkish signaling. But that didn’t really happen. The central bankers stuck to their December interest rate target which implies 3 rate cuts of -25 basis points through the end of the year. At first glance that would be an everything-coming-up-roses projection for stocks.
Getting technical, we see that FOMC members raised their Fed Funds Projections slightly in 2025, 2026, and so-called “Longer run”. Logically, that is most likely a response to the Fed’s improved GDP projections this year through 2026. The slightly tighter interest rate policy was noted and largely excused by markets which rallied last Wednesday and Thursday. On the path of rate cuts, the market is finally in sync with the Fed. Overnight Index Swaps now predict a 100% chance of 3 cuts and a 22% chance of a fourth. For some frame of reference, swaps were predicting twice that amount just 2 months ago. And with that, blue chip economists are indicating a 40% chance of recession in the next 12 months, down from 50% in January. Oh, and the 2-year / 10-year yield curve is still inverted, which is a well-known, historically, high-probability market predictor of recession. In fact, the curve flattened further, that is, it got more inverted since January, which may imply higher probability of recession according to the market.
Are you confused yet? Don’t be. Just pay attention to what Jerome Powell told us outside the numbers and the official statement. He talked about how it would be appropriate to slow down quantitative tightening. He implied strongly that the Fed would be willing to tolerate short-term inflation target overshoots. He also implied that the Fed wanted to avoid job-cut momentum. WOW, in case you didn’t know, that is the first real mention of the Fed’s OTHER mandate since its hawkish pivot in late 2021. When the Fed is worried about unemployment, it usually comes with looser monetary policy. This, combined with the projections I mentioned a few paragraphs and 1 lukewarm espresso ago, implies that, according to the most power economists in the world, the US economy is healthy and that they will not stand in its way, FOR NOW. So, for now, let’s just say all is good.
In the week ahead, we will get the Fed’s favorite inflation figure PCE Deflator which surely, the FOMC had an early glimpse of. So, any shockers are likely to be lower. If they are higher, the Fed is clearly not concerned. I will be watching Consumer Confidence closely, because that is the ember that sparks consumption which is good for the economy, and it has been languishing in the past year. I will also be paying close attention to the first wave of FOMC members to get out and speak after last week’s policy meeting. They like to talk, as I am sure you know, and they will likely parrot their positions from last week’s forecast. It should be noted that most folks talk about the median projections, which are statistically meaningless without knowing at least the range of those projections. For example, at least 2 FOMC members expect Fed Funds to remain unchanged by yearend. We can expect those members to attempt to throw cold water on the bulls. Ok, I have droned on too long about this. The bottom line is that the Fed is OK for the moment. In the weeks ahead we must take a hard look at companies themselves and determine if they can live up to the great things their stock prices currently suggest.
FRIDAY’S MARKETS
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