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It’s (Still) The Economy, Stupid
On Thursday, I channeled a popular derivatives strategist in describing the idea of a Fed pivot as "
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Mester is a died in the wool hawk. She almost always wants to raise rates. Her statements lately are not really earhtshattering are they? I want to share an anecdote. I have been trying to sell an UES apartment for an aging parent who is no longer living there. We recently got a good offer but the traffic there is very quiet. And I keep hearing the same thing about other housing markets I am not plugged into. It is evident to me, that the housing market is slowing down sharply. All the metrics on housing you are hearing now are stale. How about autos and their prices- well I keep seeing reports that chip backlogs are being worked through and are in much better shape. Its a good bet that car prices are probably going to be pretty stable to slightly lower in the near future. There is little doubt that the Fed is going another 100 bps shortly. But looking out in the great USA, one can see growth slowing pretty sharply- and corporate profits are squeezed. Corporation cut employent when profits stall or go down. So, saying there is no supply chain fix is a bit of a straw man argument. Besides getting Putin to leave Ukraine, or getting China out of a lockdown, what will work out things is TIME. OPEC just announced more supply. China is stimulating and lifting lockdowns. NATO and the US likely are discussing methods to export Ukrainian grain either by reflagging ships or sending it overland. Politics and the economy does not stand still. Given QT and 175 bps in a leveraged economy, the only surprise will be if we are not in a pretty sharp slowdown by the fall. The UST yield curve is flashing yellow and credit spreads are widening, partilcularly in the high yield space. I am not predicting a crash by any means- but it is pretty doubtful the Fed will be able to raise rates as aggressively as the hawkish contingent says.
I had not thought of “the raising of interest rates” as a tool to kill demand but i guess that is the end result. Obviously as you mention inflation also reduces demand by devaluing money. As does QT by devaluing equity and bonds. Given all the above and the war, its hard to see how the market continues to stay up.
I think you just inadvertently provided the Democrats with the solution to their midterms problem. Helicopter money in October will mean a blue wave in November.