Ruining The Fun

Richard Clarida probably wasn’t trying to ruin anyone’s fun on Wednesday, and on any rational interpretation, he didn’t. US equities were fine.

Sometimes, it feels like market participants need to be reminded that daily moves on the benchmarks should be quoted in percentage terms, not in points. You laugh. And I laugh. But we do forget that — if only for a fraction of a second.

I don’t care how long you’ve been in this business: If the Dow falls 323 points, you instinctually do a double take. Then, hopefully, you remember that’s less than 1% and go back to your 4 PM bourbon in midtown (or your tall Heineken on the Metro North).

Clarida took the blame for equities’ minuscule swoon. “US Stocks Close in the Red After Clarida’s Hawkish Comments,” one headline declared on Wednesday afternoon “S&P Slumps While Yields Climb on Hawkish Fed,” said another. You’d think “the Vice” had overthrown the chain of command and unilaterally hiked rates himself by decree. In reality, he delivered some (very) gentle forward guidance that I suppose was “hawkish” at the margins. Unless you’re a STIR trader, I’m not sure it was very notable (I tried to make it interesting for you — see the linked article, below).

Read more: One Big Hall Of Mirrors

More relevant for everyday people was the lackluster ADP report, which featured what I think it’s fair to describe as an underwhelming read on the leisure and hospitality sector.

Peter Boockvar, who I’ve (probably unfairly) lampooned in the past for being a veritable wellspring of uninteresting, boilerplate media soundbites, had a decent take Wednesday. “I really don’t like to use the word ‘stagflation’ but we have a form of it now, unfortunately, which will make the job of the Fed that much more difficult,” he said.

It’s true. Inflation is high and the familiar chart (below) is a reminder that the labor market is still miles from “fixed.” It (the chart) will get a refresh on Friday. If ADP is any indication, the number in the header will likely still be above 6 million.

The “hall of mirrors” article (linked above) is worth a read not because anyone enjoys Fed tasseography, but because it emphasizes how self-referential things have become, and places Wednesday’s price action in that context.

“What started out as an ADP inspired bull flattening was more than offset by the stronger-than-expected ISM services index,” BMO’s Ian Lyngen and Ben Jeffery said, in their daily wrap. “Either the service sector isn’t as concerned about the fallout from the Delta variant or the relative recency of the worries have yet to be reflected in sentiment on the ground,” they added, on the way to noting that Clarida’s comments were “less-dovish than assumed given the renewed uncertainties surrounding the path of the pandemic.”

The market wants the Fed to acknowledge the risks associated with the new wave of infections in the US. If the Fed refuses, policymakers could end up staring at an unpalatable scenario, as the market prices in rate hikes alongside slower growth, until someone blinks. For right now, the Delta variant isn’t swerving when it comes to the game of chicken with America’s reopening efforts, which are largely proceeding apace. Mask and vaccine mandates aren’t lockdowns, after all.

“Between 1) mounting signs that ‘the best is already behind us’ from an economic growth perspective here in the US, alongside clear ‘slowing’ in China, 2) the Delta variant frenzy risking elements of reopening, 3) expected forward US TGA drawdown and 4) likely [slowing of] nominal issuance into Q4, many [are] of the view that we’re heading back to lower yields and flatter curves moving forward,” Nomura’s Charlie McElligott said. He then reiterated a few key counterpoints. “Regardless, the turn into September/Q4’s strong ‘risk-on’ seasonality, the firming up of the ‘official’ tapering announcement and anticipation of Delta variant concerns rolling over… still has many wanting to take shots at ‘bearish Rates/USTs’ expressions [and] re-rack ‘Value over Growth’ trades in US equities,” he added, noting that clients are “looking at end-August / September as an opportunity to put trades on.”

Meanwhile, Elizabeth Warren may have seen enough of Jerome Powell. If that’s too strong (and it probably is), then suffice to say Washington’s staunchest regulatory crusader would prefer Lael Brainard. “My concern is that over and over [Powell] has weakened regulation,” she told Bloomberg. “We need someone who understands and uses the monetary policy tools and the regulatory tools to keep our economy safe. Let’s not forget what happened in 2008.”

Talk about ruining the fun!