By Peter Tchir of Academy Securities
Powell’s Walk-Up Song
Unless something dramatic and unexpected happens this week on the geopolitical or earnings front, trading and returns will be largely determined by what Fed Chair Powell says between 2:30pm ET and 3:00pm ET on Wednesday. Every other market driver will take a back seat to what Powell says during the post-FOMC rate decision conference.
This presentation is more important than usual because no one has listened to a word that any other Fed Speaker has said. Okay, maybe we’ve listened, but no one has done much on the basis of those speeches.
Prior to the December 13th meeting, Powell had remained steadfastly “neutral” and “data dependent.” That was the message that he gave when speaking prior to the last meeting. It was more or less consistent with other Fedspeak.
We didn’t believe him. Although we expressed some concern that the market had eased financial conditions significantly ahead of the meeting, we weren’t too worried. Yes, the market-imposed financial tightening had influenced the Fed heavily for the November 1st decision, but we thought that he would be mildly dovish given the inflation data (and even hints of concern about the job market).
Wow were we wrong! Not as wrong as those calling for a hawkish Fed, but the “pivot” was more aggressive than we expected. Fortunately, we liked risk coming into the meeting and that paid off, but there was definitely an element of “better lucky than smart” playing out as the market boost was more than we had expected, because we (I) didn’t anticipate the “pivot.”
Since that press conference, no one in the market is listening to anyone other than Powell (at least I’m not). Even with Powell (I’m not sure if he spoke this month), all that will really matter is what he says at the press conference and he has given whole new meaning to “past performance may not be indicative of future results.” He taught the market that what he says coming into the meeting may not be what he says after the meeting (a very weird lesson to teach the market for an entity that relies so heavily on “jawboning”).
All of this got me thinking about what should Powell’s “Walk-Up” song be? Or maybe what song he should listen to in order to get pumped up for the press conference. While it might not be the song that he would choose for himself (I suspect not), I think that “Here I Go Again” is the perfect “Powell Walk-Up Song.”
I don't know where I'm going
But I sure know where I've been
Hanging on the promises in songs of yesterday
And I've made up my mind I ain't wasting no more time
Here I go again, here I go againThough I keep searching for an answer
I never seem to find what I'm looking for
Oh, Lord, I pray you give me strength to carry on'Cause I know what it means
To walk along the lonely street of dreamsHere I go again on my own
Going down the only road I've ever known
Like a drifter, I was born to walk alone
And I've made up my mind
I ain't wasting no more time……
I’m pretty sure that this song played on the radio while I was driving around Michigan last week, but the lyrics seemed to fit perfectly for how I’m thinking about this meeting! I have to admit, in “researching” this report, I had no idea that Whitesnake is a British Band.
Don’t Know What Powell is Thinking But Here’s My Take
I’m on board that inflation has been on the decline, but I’m far from convinced that the next step is lower (especially if something happens forcing the U.S. to enforce full sanctions on Iran’s oil production and sales).
Consumer strength has surprised to the upside, but it was a heavily discounted holiday season. Consumers also seemed to have tapped into credit to the point that it is so difficult to ignore all the credit spending as a “mere normalization” from Covid-era lows.
Jobs have tilted to slightly weaker, but the data is all over the place (claims, household, ADP, establishment, JOLTs, etc.). Not only have the different reports been, well “different,” but also many of the reports have had internal inconsistencies that are difficult to explain away (other than “garbage in, garbage out”).
One slightly “weird” thing about this meeting is that NFP comes out on Friday, so presumably the FOMC will have some insight into that data (the market will certainly believe that is the case).
My playbook for Wednesday (and the future is):
No changes to monetary policy.
Repeat that it is too early to think about ending quantitative tightening. It is a discussion topic, but not urgent.
A teensy-weensy victory lap. Inflation has come down and evidence that it can remain contained is high, but we have to be vigilant.
An acknowledgement that rates are higher than their long-term requirements and that they are watching the data as they think about a path to “normalization.” He will not pivot back!
Which leaves us with our current expectation (which we’ve had for several weeks and the market is coming in our direction).
100 bps of cuts. The FOMC will do 25 bps, then 50 bps, then 25 bps, then go into stall/wait and see mode.
I am 100% convinced that the Fed will want to avoid cutting in September and November (too close to the election, and much easier to avoid if possible).
I was leaning towards the first cut being at the April/May meeting, but several clients pointed out the following during recent discussions: given my view on inflation (even the “services bump” is declining) and the Fed not wanting to enact monetary policy close to the election, I was probably just being stubborn, and should predict a March start. So, let’s call it 50/50 on whether the 25/50/25 starts in March or May.
I think that the Fed should continue to decrease the balance sheet so that they have “dry powder” if needed. Having said that, there are technical issues around reserves that seem to warrant higher longer-term balances than I would like to see. So, I hope that they downplay the possibility of ending QT, but my job is to think about what the Fed will do, not what I would like them to do, so we will probably see just enough on this front during the Q&A to keep markets happy.
I suspect, given what has been priced in (on rates, pivots, and QT), that Powell will disappoint markets (call it a 2% to 4% downward move in stocks, with 10s pushing above 4.3%), but nothing disastrous, and will let the other factors (earnings, jobs, etc.) take center stage.
Bottom Line
Since we’ve already given away the “bottom line” on the Fed and markets, let’s just focus on two quick things:
Pricing in Geopolitical Risk. We discussed this extensively in Weebles Wobble and it remains a topic of conversation.
Some (but not all) geopolitical risk is being priced in, so a “surprise” in either direction on that front will have some market impact, but it shouldn’t be extreme.
My view that there will be no “flight to safety” at the long end of the yield curve (7-years and out) is getting some traction and causing some to rethink hedging geopolitical risk with longer-dated Treasuries and bet more simply on dollar strength or a surge in commodities (and commodity stocks).
On Friday, Academy had a relatively long interview on Bloomberg TV. Given the amount of feedback that we’ve received on this particular segment, it seems to make sense to provide a more detailed “viewing guide” than usual.
1:54:50 mark. “The Rush into Bonds.” Contrasting views on Treasuries (higher yields) and corporate credit (highly recommend overweighting high-quality credit versus Treasuries, especially 5-years and in – even managed to mention commercial paper!). Bloomberg posted a chyron to that effect at 1:58:35.
1:58:40 mark. “Geopolitics.” It starts with a quick intro from the hosts, and we go on to discuss Russia/Ukraine, the Middle East, and other geopolitical possibilities. We get to discuss what is hedged or not hedged, and how effective various types of hedges will be.
2:00:50. CONsumer CONfidence. Not quite sure how we got on the subject, but I did get to give a shout-out to my strategist when I was trading CDX indices through the financial crisis – Bob Janjuah. Also got to gripe about the overall quality of economic data (not just this particular survey), and how useful it is or isn’t! It was a long segment in the new studio!
For what it is worth, if we had “walk-up” songs when I was playing sports, my choice would have been “Anarchy in the U.K.” – and on that note, have a great Fed week and don’t judge people on their walk-up songs.
