Members of the Federal Reserve descended upon the market yesterday, determined to frighten the market. And they succeeded, but none succeeded, like St. Louis Fed President James Bullard in the MarketWatch interview. Nevertheless, Bullard didn’t hold back in his quest to extinguish hope. That hope had been rekindled since early October – it was doused yesterday. Once again, Bullard took a blow torch to the stock market.

“The Federal Reserve will likely need to keep its benchmark policy rate north of 5% for most of 2023 and into 2024 to succeed in taming inflation.”

“I think Fed funds rate will need to remain in the 5% to 7% range all during 2023 and into 2024.”

“Inflation will be stickier than investors expect, and it will likely take a while before it returns to the Fed’s 2% target. “They will come down I think, that’s my baseline, but they probably won’t come down as fast as markets would like.”

“I’ve tried to de-emphasize the links between inflation and the labor market.”

“I don’t think that the feedback from the strength of the labor market to inflation is nearly as strong as many people portray it.”

Heat Map

The week after Thanksgiving usually sees some indigestion and a little letdown, but that was a lot more than a letdown. It was a reminder that so many things factor into the market these days. A potential revolt in China sent our market lower because our leaders sent millions of jobs overseas and ultimately created a rival economy that now takes precedence over our businesses.

Apple (AAPL) is at the top of the list of companies with huge Chinese exposure. Unfortunately, the stock took it on the chin.

Too Sanguine?

The Fear & Greed gauge is edging over but still in the ‘greed’ zone, which is a lot better than where it was a year ago when the wheels first started coming off the rally.

We know the Fed is thoroughly upset there isn’t more fear among investors. 

Meanwhile, before bouncing yesterday, the CBOE Market Volatility Index (VIX) got all the way down to 20.50.  Lately, the play has been easy – if the VIX under 20 go ‘short’ and if the VIX above 30 go ‘long’.

Recession Watch

The 10y-3m inversion has reached 0.73, which has only happened in the years 2000 to 2001, 1979 to 1982, and 1973 to 1974 – all periods of a significant recession.

Portfolio Approach

There are no sector weighting changes to our Hotline Model Portfolio.

Today’s Session

Waiting on Consumer Confidence at 10AM as scuttlebutt over the next big Fed move, and Powell’s comments tomorrow, have equity future at a standstill. Yesterday, NY Fed President John Williams used an onion analogy to explain inflation and challenges facing the Fed.

In his remarks, President Williams said that one way that he’s been thinking about the problem of inflation is through an analogy of an “inflation onion” that has three distinct layers.

The outermost layer consists of prices of globally traded commodities that saw a surge in demand, leading to sizable imbalances between supply and demand, and ultimately large price increases. The middle layer is made up of other products that experienced both strong demand and severe supply-chain disruptions, contributing to outsize price increases. The innermost layer is underlying inflation—the most challenging of the three—reflecting the overall balance between supply and demand in the economy and the labor market.

He then went on to explain where all these inflationary layers stand today and what to expect in the future, while noting the Federal Open Market Committee’s strong, decisive policy actions in support of its steadfast commitment to price stability.

President Williams also gave his economic outlook. He expects:

• Real GDP to increase only modestly this year and in 2023.
• Unemployment to climb from its current level of 3.7 percent to between 4.5 and 5 percent by the end of next year.
• Inflation to slow from its current rate to between 5 and 5.5 percent at the end of this year, and to slow further to between 3 and 3.5 percent next year.

Buying Time Can be Expensive

This morning, the Redbook Retail report came in at 10.4 against estimate of 7.5.  The number used to move the needle years ago, but in the age of internet shopping, it is less relevant but still points to folks spending even though it’s on borrowed money at higher interest rates.

 

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