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The ‘Fed Pivot’ Debate

Published August 1, 2022

Powell clearly hinted at ‘neutral policy,’ but was he speaking out of turn?

The following is an amended form of the Daily Contrarian of Aug. 1, which today also featured the host singing the opening of the Swiss national anthem in honor of Swiss national day. This briefing and accompanying podcast are released to premium subscribers each market day morning by 0700. To subscribe, visit our Substack.

As we start the week there are fresh doubts about this ‘Fed pivot’ that drove much of last week’s rally. If you’ll recall, comments by Fed chair Jerome Powell at his press conference led investors to conclude the Fed was going to reverse course on interest rate hikes and soon. This conclusion was refuted by Minneapolis Fed President Neel Kashkari late Friday, which has led to much pontification on Twitter and elsewhere.

Here is what Powell said that led investors to pile in to risk assets on Wednesday afternoon to start a rally that held the rest of the week.

Quote from Fed Chair Jerome Powell press conference, July 27, 2022.
Source: Jerome Powell press conference, July 27, 2022. Meme via IMGflip.com

Handicapping the Fed is a dangerous game but so far the market doesn’t appear to be too concerned by Kashkari’s comments. We’ll hear from other Fed officials tomorrow and again later in the week. That’s what’s scheduled, at least. If the Fed is serious about reeling back Powell’s comments they can have officials do interviews on CNBC and elsewhere. So that is maybe worth watching. Maybe Kashkari was the one speaking out of turn?

It’s another busy week for earnings, which should drive things most of the week. The main event however is Friday’s non-farm payrolls. As we know, the labor market has proven itself quite resilient so far in the face of tighter monetary policy, though unemployment claims are up.

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Big Week Ahead: Earnings, GDP, Fed Interest Rate Decision

Published July 25, 2022

The following is an amended form of the July 25 Daily Contrarian. This briefing and accompanying podcast are released to premium subscribers each market day morning by 0700. To subscribe, visit our Substack.

We are staring at a three-headed beast this week: Earnings, the Federal Reserve’s interest rate decision, and economic data.

Three-headed beast. Promo image for the original Showa iteration of King Ghidorah. Source: Toho Co via Wiki
Promo image for the original Showa iteration of King Ghidorah.
Source: Toho Co via Wiki

The Fed interest rate decision is Wednesday. Second-quarter GDP is Thursday. The most important economic data release isn’t until Friday with the Personal Consumption Expenditures, aka the Fed’s preferred inflation gauge.

The FOMC and Q2 GDP will get the lion’s share of attention. Both could turn out to be non-events. GDP is a trailing indicator and anyway this is just the first estimate of Q2 GDP. Yeah if it prints negative that will be two consecutive quarters, which technically means we were/are in recession, blah blah. Doesn’t change the fact that this tells us something which has already happened. As such it is unlikely to move markets very much.

MoreBig Week Ahead: Earnings, GDP, Fed Interest Rate Decision
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Fed Certainty, Not Earnings, Drove Stocks Rally

Published July 20, 2022

The following is an amended form of the Daily Contrarian briefing from July 20. This briefing and accompanying podcast are released to premium subscribers each market day morning by 0700. To subscribe, visit our Substack.

Stocks put in a major rally yesterday. The Nasdaq gained more than 3% on the day and S&P 500 was up 2.8%.

The bounce is being attributed to earnings, but most of these were not that great and several companies also scaled back their outlook for the rest of the year. Then there was Netflix (NFLX), which rallied after hours despite announcing a loss of almost 1 million subscribers. The stock rallied because it had previously predicted a loss of 2 million. (Note to streaming companies: Just predict a huge loss of subscribers, more than twice what is likely then sit back and watch your stock rally).

Remember that markets hate uncertainty more than they hate bad news. The Federal Open Market Committee, or FOMC, meets next week to decide on interest rates. Talks of a 1% rate hike that spooked markets after last week’s inflation reading have given way to the far more likely reality of a 0.75% hike — and that is now being accepted as gospel. The source for this appears to be a speech by Fed governor Chris Waller, which has led the Wall Street Journal to all but declare the 1% hike to be off the table.

MoreFed Certainty, Not Earnings, Drove Stocks Rally
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