What Could Force A Fed Pivot? $800 Billion Sees Five Catalysts

The “Bostic pause” story was a cruel canard. That much is now clear.

In a subsequent interview with MarketWatch, Bostic himself sought to dispense with the notion that he was attempting to reinstate the vaunted “Fed put” when, during remarks to reporters following an address to the Rotary Club of Atlanta last month, he said it was possible the Fed could “pause” rate hikes in September to assess the impact of tightening delivered over the preceding four FOMC meetings.

Since then, the Fed has pivoted decidedly more hawkish. In addition to Lael Brainard’s explicit repudiation of the “pause” narrative and similarly skeptical remarks from Loretta Mester, it’s now obvious the Fed intends to hike 75bps at the June meeting, with another 75bps likely next month.

Read more: Fed Spiral: 50 Was The New 25. Now 75 Is The New 50

We know what compels policymakers to remain stuck in “full-hawk mode,” as some analysts describe the FOMC’s current policy bent. And we know where the Fed put isn’t (e.g., it’s not SPX 4,000 or 3,900 or 3,800).

So, what would compel the Fed to switch modes or reinstate the put? Those are hopelessly clichéd questions by now, but people keep asking them, and perception matters, so I suppose it’s worth documenting the evolution of investor opinion.

According to the June vintage of BofA’s Global Fund Manager survey, which included responses from investors with some $800 billion in AUM between them, the most likely reason for a Fed “pause” or “pivot” is a PCE print below 4%.

As the figure (above) shows, we’re nowhere near that. In fact, the overshoot to target is more than 4% on its own.

The second most likely reason for a shift in the Fed’s thinking, according to BofA poll respondents, would be a rise in jobless claims above 300,000.

We’re nowhere near that either, although the four-week moving average has risen of late (figure above).

The third catalyst for a “pause” or “pivot,” according to fund managers, is a drop below 3,500 on the S&P. Needless to say, we’re not there yet (simple figure below), but it’s not out of the question.

As documented in “The Math Just Doesn’t Work For US Stocks,” there are any number of permutations that could make that level (or lower) on the benchmark a reality.

Merely applying a 14x multiple to existing bottom-up consensus EPS estimates would get you there. Of course, that’s a very low multiple, but 16x on $225 in aggregate EPS gets you close too, and if you think both the economy and corporate earnings are on the brink of a material downshift, that’s an entirely plausible conjuncture.

As for credit, BofA survey participants suggested junk spreads at 500bps might prompt the Fed to reconsider. That too is a threshold not yet achieved, although we were close prior to last month’s bear market rally (figure below).

I’d note that CDS spreads for IG and HY are out to two-year wides and junk issuance has dried up. Volumes are running at just $66 billion so far in 2022, the most anemic pace since 2009.

Finally, some participants in BofA’s survey suggested oil prices below $90 might prompt the Fed to pivot. Obviously, energy is a big part of the inflation equation, so any reprieve there would be a welcome development, but in isolation, a drop in oil prices isn’t going to move any needles at the Fed.

As for the actual strike of the Fed put, the ~300 panelists who participated in this month’s BofA poll reckoned 3,453 is the magic number. In February, fund managers’ best guess was 3,700.