Uber-hawkish Fed? Banking crisis II? Markets: we don't care!
As I summarized yesterday: the Fed's hawkishness does not mean much for the markets today. Talk is cheap.
Let's assume that the Fed wanted to really be hawkish today and move from words to deeds, what could it do? Raise interest rates? It would be suicide (political and social) - after all, inflation dropped from 9% in June 2022 to 3.3% in December 2023. The only real tool the Fed has today is not to cut rates on March 20 and somehow explain it to everyone... and then "wipe and repeat"... not to lower rates on May 1 and explain it to everyone... - but then how to explain the FED pivot of December 13, 2023 in such a context? Therefore, markets don’t care too much what the FED says.
To be fair, the recent declines (both in stocks and bond yields) were more caused by the risk of another banking crisis than by a hawkish Fed... but (at least for the stock market) banking crisis II could be “an opportunity”... Yes, a crisis means FED’s reaction and new FED’s liquidity - like last year FED's BTFP (Bank Term Funding Program). So buy stonks. Figure 1 shows selected YTD indices.
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Mag7: Apart from Nvidia, all companies from the Mag7 club have already published their Q4 2023 results. What is the market reaction? Figure 2 shows the relative (to the S&P500) behavior of stocks after the publication of the results (according to current prices in after-hours trading).
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And quite interesting yesterday's data: accelerating economic growth (ISM manufacturing is up significantly, Atlanta FED Q1 GDP tracker up to 4.2%) and at the same time a weakening labor market (initial claims up significantly + markets expect the unemployment rate to increase in January from 3.7% to 3.8%). This scenario is even better than goldilocks one! GDP up & unemployment up. Go figure.
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