Fed Pivot
Rumor Drives Dow to Best October in Decades
By Victor
Sperandeo with the Curmudgeon
Introduction:
We attribute the recent U.S. equity market rally to
Wall Streets perception (yet again) that the Fed wont raise rates as much as
theyve hinted at with their seemingly never-ending hawkish drumbeat talk. While that also drove the rally from July to
mid-August which fizzled (all averages broke their June lows in September), the
market believes this time is different. Do you?
The Fed Whisperer that seemingly sparked
this months rally on October 21st has just published a WSJ article
that implies the Fed will be raising rates higher than they planned due to a
resilient consumer. That despite the
Feds attempt to reduce consumer spending via a reverse wealth effect due to
crashing markets.
We examine the Feds balance sheet and an under
reported shortage of diesel fuel that could drive up prices and keep rates
higher for longer. Finally, we conclude with a comment on the November 8th
U.S. mid-term elections and a supporting cartoon.
Equity Markets Rally on (yet another) Perceived Fed
Back-Off:
The stock market rally that began on Friday morning,
October 21st was stimulated by an article in the WSJ by a reporter known as
the Fed Whisperer (whose real name is Nick Timiraos). It was very important because Timiraos is
supposedly connected to leaked inside Fed information. He let it be known that
the Fed was going to hike rates by 75bps in November followed by a lower Fed
Funds rate increase (50bps?) in December.
Timiraos wrote, Some Fed members are concerned about
the danger of raising rates too high. However, he indicated the Fed did NOT want
markets to rally as they did from July to mid-August on the expectations of a
more dovish Fed monetary policy.
Markets rallied in July and August on expectations
that the Fed might slow rate rises. That conflicted with the central banks
goals because easier financial conditions stimulate spending and economic
growth. The rally prompted Fed Chairman Jerome Powell to redraft a major speech
in late August to disabuse investors of any misperceptions about his
inflation-fighting commitment.
If officials are entertaining a half-point rate rise
in December, they would want to prepare investors for that decision in the
weeks after their Nov. 1-2 meeting without prompting another sustained rally.
-->According to several credible sources, this new
assessment of the Fed backing off their jumbo rate hikes is what caused
the equity markets to rally this month.
Its the best October rally since 1976 for the Dow Jones Industrial
Average (DJIA) which has rallied for the last six consecutive trading days
(from the 30,291.18 open on October 21st to the 32,861.80 close on
October 28th).
With a month-to-date gain of 14.40% through Friday,
the DJIA, +2.59% is on track for its best monthly performance since January
1976, when it rose 14.41%, according to Joe Adinolfi who reports for MarketWatch.
The DJIA just needs to close higher by 2 basis points on
Monday, October 31st to surpass January 1976 as the best month since
the 1930s. A historical look at October DJIA rallies is depicted in this table:
Table courtesy of Bespoke Research
..
Is the Fed Whisperer Now Trying to Talk the Markets
Down?
This Sunday, October 30th, Mr. Timiraos wrote a WSJ article implying
the Fed will have to raise rates higher than the U.S. central bank forecast at
their September 2022 meeting.
From that new WSJ article:
Some economists think it (the Fed Funds rate) will
have to go higher than 4.6%, citing in particular reduced sensitivity of
spending to higher interest rates.
The big question will be, given the resilience the
economy has had to interest-rate increases so far, whether that will actually
be sufficient, said former Boston Fed President Eric Rosengren. The risks are
theyre going to have to do a bit more than theyre suggesting.
This is not the earnings season the [Fed] wanted to
see, said Samuel Rines, managing director at Corbu LLC, a market intelligence
firm in Houston. For now, the consumer is too strong for comfort.
The Commerce Department reported Friday that consumer
spending adjusted for inflation rose 0.3% in September from August, a pickup
from prior months.
The upshot is that cooling the U.S. economy might
require even higher interest rates. The household savings buffer suggests to
me we may have to keep at this for a while, said Federal Reserve Bank of
Kansas City President Esther George in a webinar earlier this month.
Steven Blitz, chief U.S. economist at research firm
TS Lombard, thinks the central banks policy rate will rise to 5.5%. A
recession is coming in 2023, but there is more work for the Fed to do to create
one, he said.
The danger is that higher interest rates or a stronger
dollar make trouble in corners of a global financial system that had come to
expect low interest rates to persist.
..
Feds Hawkish Talk/QT Hasnt Materially Reduced its
Balance Sheet:
The original Fed (dot plot) projections for rate
increases were: +75bps November 2nd, then 50 bps on December 14th
and 25bps in January. Well have to
wait for Powells November 2nd news conference to get a hint at
whats to expect at the December FOMC meeting (the market now expects a 50bps
rate hike) and for early 2023.
.
IMPORTANT Opinion: The
Curmudgeon and I strongly oppose Fed talk (hawkish or dovish) and forward
guidance outside of FOMC meetings. We think there should be a quiet period,
much like what applies to companies before earnings releases. Furthermore, the Fed should NEVER use a
whisperer to convey its plans to the markets.
Instead, the Fed should deliberate and debate the
course of monetary policy at each FOMC meeting and not say anything for public
consumption between meetings! Such
silence would be golden for the markets.
.
Despite the jumbo rate hikes and accelerated pace of Quantitative
Tightening (QT) that commenced in September, the Feds balance sheet is
still higher than it was on 11/30/21 when the Fed admitted that inflation was
NOT TRANSITORY. As weve previously noted,
its mind boggling to us that Powell and his motley crew waited till March
2022 to stop QE and raise rates by only 25bps.
Diesel Supply Shortage Could Drive Up
Prices/Inflation:
On October 19th, Bloomberg reported that the U.S. has just
25 days of diesel supply, the lowest since 2008, according to the Energy
Information Administration. At the same, the four-week rolling average of
distillates supplied, a proxy for demand, rose to its highest seasonal level
since 2007. While weekly demand dipped slightly, its still at highest point in
two years amid higher trucking, farming, and heating use.
The diesel crunch comes just weeks ahead of the
midterm elections and has the potential to drive up prices for consumers
who already view inflation and the economy as a top voting issue. Retail prices
have been steadily climbing for more than two weeks. At $5.324 a gallon,
theyre 50% higher than this time last year, according to AAA data.
Fox News host Tucker Carlson
ripped the Biden administration Thursday for the U.S. ongoing
diesel shortage, saying that America faces an economic catastrophe if stocks
arent replenished. Thanks to the Biden
administrations religious war in Ukraine, this country is about to run out of
diesel fuel. According to data from the Energy Information Administration,
by the Monday of Thanksgiving week, thats 25 days from now, there will be no
more diesel [fuel]. So, whats gonna happen then?
Everything will stop, Carlson said.
The truth is these people are bumping right smack up
against reality. Here is the reality: We have 25 days to avert economic
catastrophe, Carlson said. Catastrophe is what will happen if we run out of
diesel fuel. Thats more important than prosecuting a jihad in Ukraine. Its
more important than World War Trans.
Mid-term Elections:
The mid-term elections on November 8th are
of great importance and we strongly recommend all Americans vote. The
Curmudgeon spent the better part of two days reviewing the candidates and
CA/Santa Clara propositions and is voting today.
However, dont look to the polls to forecast the
election results as per this cartoon:
Cartoon courtesy of http://www.gorrellart.com/
..
Sidebar: BofA
- S&P 500 quarterly EPS forecasts 2021-2023:
(Bottom-up consensus vs. BofA estimates)
End Quote:
With this weeks FOMC meeting, please think about
this quote:
The process [of monetary inflation] gives rise to a
redistribution of income in favor of those who first received the new
injections or doses of monetary units, to the detriment of the rest of society,
who find that with the same monetary income, the prices of goods and services
begin to go up.
. Jesus
Huerta de Soto is a Spanish economist of the Austrian School. He is a
professor in the Department of Applied Economics at King Juan Carlos University
in Madrid, Spain, and a Senior Fellow at the Mises Institute
Be well, stay healthy, try to cope with the financial
chaos and all asset wipe-out the Fed has created. Wishing you peace of mind,
and till next time
The Curmudgeon
ajwdct@gmail.com
Follow the Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies, and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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