In yesterday’s note I quoted myself from Tuesday’s note… Now, here’s me, today, quoting myself quoting myself from yesterday:

“In yesterday’s blog post I suggested that the Fed isn’t quite yet ready to welcome, nor support, rallying markets:

“It’ll be interesting to see (amid softening inflation reads) the degree to which Fedheads push back against what amounts to a market-induced loosening of financial conditions.””

In yesterday’s Wall Street Journal, James Mackintosh pounded home the notion that the Fed indeed does not relish market rallies right here.

From his article titled Markets Zoom Toward Collision With the Fed:    emphasis mine…

“Investors are betting big that the Federal Reserve will be able to ease off its fight against inflation. The Fed needs to push back to prevent the markets prematurely easing on its behalf.

Last week showed the extreme sensitivity of markets, when below-forecast inflation for October led to the second-biggest drop in 10-year Treasury yields on record, behind only the day in March 2009 when the Fed said it would start to buy long-dated Treasuries.”

Seriously, you’d think, based on last Thursday’s action, that the Fed came out and announced a massive pivot:

“Two-year Treasury yields fell the most since Lehman Brothers failed in 2008, and before that since the Sept. 11, 2001, attacks. The ICE U.S. dollar index plunged 3.85% in two days, only slightly less than the 4.08% in the two days after the international Plaza Accord designed to weaken the greenback was made public in 1985.

Stocks naturally soared, with the S&P 500 up 5.5% and the ARK Innovation ETF, which holds lots of lossmaking do-or-die growth stocks, having by far its best day ever with a 14.5% gain.”

While we remain open to all possibilities, we can’t help but agree with the following:  emphasis mine…

“I think this is wildly overdone, and can’t be justified by a slightly-better-than-expected figure in a single month of volatile data—although it was then backed up by lower-than-expected producer price rises on Tuesday. But the market gains make life harder for the Fed, because the drop in Treasury yields is roughly equivalent to raising rates 0.25 percentage points less by the end of next year—one fewer of what used to count as a full Fed rate increase.”

In some ways it is even worse than that. Better conditions in the market prompted a rush to issue corporate bonds by companies that had been waiting, pumping money into the economy. The extra yield demanded to hold high-risk assets fell, too, with the spread over Treasurys on the lowest grade CCC junk bonds dropping from 12.61 percentage points on Wednesday to 12.01 points on Monday.

So, again, I get it, investors are aching for any sign that inflation is coming down, and, thus, that the Fed’s gonna cease its tightening campaign… And while I indeed anticipate that the market will ultimately anticipate the Fed’s ultimate shift to more accommodating policy, monster rallies coming off of early reads of cooling inflation are not only premature, they can actually serve to raise inflation’s temperature at, let’s say, not the most opportune time — from the Fed’s perspective.

“Right now, job number one for the FOMC is to tame inflation that is unacceptably high. If high inflation persists for too long and becomes entrenched in the economy, we know that more prolonged and deeper economic pain will ensue. So, while there are risks that our policy actions to tame inflation could induce a recession, that would be preferred to the alternative.”

Well, frankly, I’m not so sure that if/when recession hits, that the Fed will be nearly as sanguine as he implies.

We do agree, however, that if indeed we do see a recession in the not-too-distant offing (still our base case), that it’ll be mild “by historical standards:”

“…the more energy you put into trying to control your ideas and what you think about, the more your ideas end up controlling you.”

–Taleb, Nassim Nicholas. Antifragile: Things That Gain from Disorder

Have a great day!
Marty