Upon concluding his testimony at the Senate, Jay Powell got the last laugh when the market crumbled like a house of cards. So today, he visits the House, where the questions probably get goofier, but Powell’s mission remains the same - scare the hell out of the market.

There wasn’t any place to hide during the session as all eleven sectors finished lower, led by Financials (XLF), which used to be talked up on higher rates.

The Street is now modeling a 70% chance of a 50-basis points (bps) hike at the next Federal Open Market Committee (FOMC) gathering. Note: there is a long time between here and the FOMC gathering, which means lots more data to comb through.

Chaos Theory

Can Powell control the chaos he wishes to descend upon the economy? It’s hard to imagine that once all hell breaks loose, the Fed will be able to flip a switch and return normalcy.

https://www.sciencedirect.com/science/article/pii/S2666720721000230

Although there is considerable literature in which Chaos Theory is applied to Economics for the theoretical construction of chaotic models [3], it is less frequent to find contributions showing that chaotic behavior in economics models can be controlled. Chaos control theory studies the design of intervention rules to eliminate chaotic behavior. This control theory of chaotic systems can provide a rigorous foundation for Taylor’s monetary policy rules.

Meanwhile, the 2y-10y yield spread hit 1.05%. The last time this yield curve was at this level was in March 1980 when it slumped to 242 basis points.

Putting on the Brakes

When it comes to the Federal Reserve, the great fear is they will go too far in their quest to quell inflation. The reason everyone is worried is because the Fed isn’t known for being:

Subtle

Adjective

(Especially of a change or distinction) as delicate or precise as to be difficult to analyze or describe.

Or

Strategic

Adjective

Relating to the identification of long-term or overall aims and interests and the means of achieving them.

So, when pressed on job losses, Jay Powell hinted they would happen but be modest. Right now, the Fed is only modeling for a 1% point increase in the unemployment rate – I suppose that they’re hoping  people will come back to the labor market in droves.

But that means a recession, and it also means more than likely, once people start losing jobs in masses, it won’t stop at 1%.

 But I blame Congress more than the Fed for this predicament.

Congress should demand the Fed to create better tools and, of course, stop making their job harder. The spending is nuts. Now Biden wants $16 billion to find out what happened to the Paycheck Protection Program (PPP) money. The Biden budget is shocked we did a lot of new spending ostensibly offset by higher taxes. The budget won’t make it through Congress, but the wish list is a reminder this inflation scare was sparked by free money.

Consumer Credit

Consumer credit climbed slower than expected, coming in at +$14.8 billion in January, which was a bounce but still much lower than the consensus of $25.0 billion.

Portfolio Approach

We are adding a new position in Technology to our Hotline Model Portfolio.

Today’s Session

The ADP Jobs report shows 242,000 job creation in February against the consensus of 205,000.  The decline in jobs at small businesses are a greater reflection of the economic reality most are living with or bracing for.

The Goods producing numbers are intriguing, to say the least.  Natural resources jobs are surging while construction -16,000 reflects changes in building.

I think the most intriguing part of the report are pay trends.

Stayers saw 7.2% wage gains, the slowest in in a year, and changers pay growth decelerated to 14.3%.

Comments

You nailed it Charles. The problem is all the free money and that traces back to Biden and the congress. It's not that complicated but cleaning it up will be. neil bradie on 3/8/2023 9:44:29 AM

Yes - Charles! The free money is the major issue and trying to dry it up from the economy (which Congress issued the money). I am sure it somehow ended up in their pockets! FRANKLN on 3/8/2023 12:26:20 PM

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