Bad news is once again good news
Bad economic news continues to be good news for the stock market. The Fed released their “Beige Book” today. The Beige Book is a summary of observations about current economic conditions. The Fed updates it eight times a year. You can read it here. To sum it up, weak future growth is being predicted.
Bad news is good news because many market participants still believe that the Fed will pivot at any moment and they don’t want to miss out on the tremendous gains when the Fed opens up the flood gates and dumps plentiful liquidity into the economy. This is not what capitulation looks like.
In the face of multiple Fed speeches by a diverse array of governors and presidents, market participants continue to be deaf to the truth. The pivot is not happening any time soon. It is a long ways off but market speculators have been conditioned to anticipate it. Buy the dip was THE mode of operation for the past 40 years. This time around the Fed has different plans. They are going to drain the overseas reserves dry before they begin to ease conditions at home. Before long I believe we will see a blowout between the LIBOR and the SOFR rates.
The eurodollar futures curve is beginning to show signs of stress.
Today Vice Chair Brainard spoke at a conference in New York. She continued the rhetoric that Powell had at Jackson Hole.
“While the moderation in monthly inflation is welcome, it will be necessary to see several months of low monthly inflation readings to be confident that inflation is moving back down to 2 percent”
“Monetary policy will need to be restrictive for some time to provide confidence that inflation is moving down to target. We are in this for as long as it takes to get inflation down.”
Bold is my emphasis.
Look at these two quotes. How long until the pivot? First there will be SEVERAL MONTHS of low monthly inflation readings and then SOME TIME until the Fed is confident that inflation will continue to move lower. At that point, a pause is more likely. Now Brainard is no inflation hawk but it seems the entirety of the Fed has come to realization that they need to continue to tighten financial conditions.
Everything Brainard said was similar to Powell’s statement on the topic. The Fed is in no rush to pivot. A few down days in the stock market is not going to deter them from continuing to tighten. They are turning the screws on the overseas dollar markets and the fallout is tremendous. Asia and Europe are both in turmoil but that chaos has not been able to make its way across the oceans due to the implementation of SOFR.
We’ve got a couple more Fed speeches before the week is out. Powell talks tomorrow at the Cato Institute and on Friday, Chris Waller speaks in Austria (apparently the new guy gets the short-stick and has to go talk to the Europeans. I hope he knows what hes getting himself into over there). I expect both of these fellows to continue the same spiel.
