"Pivoting is not the end of the disruption process, but the beginning of the next leg of your journey."
- Jay Samit
Today is the day we've all been waiting for with bated breath. At 2:00pm ET we get the latest FOMC announcement on interest rates.
Given the recent Wall Street Journal article implying that a "pivot" is coming, the rally in risk assets over the last month, and other market pundits predicting a "pivot" ... expectations clearly seem to "expect" some form of dovish shift.
In fact, some prognosticators are going so far as to predict the potential of a massive rally in equities. In particular, J.P. Morgan came out with a call earlier this week that there is even a possibility (albeit a small one) of a one-day 10% rally in equities!
Even if the Fed does lay out the case for slowing the size of interest rate hikes, I'm not sure that is necessarily going to be a panacea for stocks. The reality remains that the world is on track to continue tightening well into 2023. We lay this out in the Chart of the Day below, which highlights interest rate expectations in most major markets into Q2 2023.
Whatever the Fed does or says later today, it also won't change the fact that inflation remains high and sticky globally (the Eurozone recently printed an all-time high in CPI at north of 10%), financial conditions are tightening, and real growth is decelerating. But whatever does come, it will indeed be the next leg of our market journey.
Back to the Global Macro Grind…
As it relates to the Fed's dual mandate of "maximum employment, stable prices, and moderate long-term interest rates," there is actually not much that implies a meaningful pivot. Certainly some components of inflation have come down, but in the most recent U.S. reports headline CPI was +8.4%, core CPI was +6.6% (a new cycle high), and PCE was +6.2% (remaining at a cycle high).
Collectively, that data all remains near 40-year highs. That isn't what I would necessarily characterize as "stable".
Meanwhile in the labor market, we had a bit of a "jolting" JOLTs job openings report this week. Specifically, in September there were 10.75MM job openings, which crushed "consensus" estimates by about 10% and accelerated from August. At the moment, there are 1.9 jobs for every available worker. Meanwhile, the overall employment rate in the economy remains near generational lows of 3.5% and monthly job additions to the economy remain positive.
As my colleague Christian Drake noted on the JOLTs data yesterday:
"In JOLTS terms, If labor demand is high (& rising per this morning’s report) and Hires are low (& falling) the yawning gap between the two represents the labor imbalance cultivating elevated wage growth.
That gap widened in the latest month, suggesting sticky high wage inflation is set to persist unless the hard landing scenario is realized in the form of a significant increase in unemployment."
So as of yet, the shock and awe of interest hikes have done very little to dent the labor market (and by default the growth of personal income). The reality is that it is likely hard to get much in the way of meaningful disinflation, as long as consumer demand remains relatively robust due to a tight labor market.
Just over a month ago Powell as much as acknowledged this when he said:
"We have got to get inflation behind us. I wish there were a painless way to do that. There isn't."
Maybe he has completely changed his mind since that statement and has opted try for the painless path. Unfortunately, the data itself doesn't give him or his colleagues a lot of cover to "pivot". But who knows? Maybe Nick from the WSJ knows something we don't and will be proven correct!
Whatever does happen tomorrow (and notwithstanding the initial market reaction), it won't change our GIP models in any meaningful way. At the moment, we are shaping up for a future of global #Quad4s into Q2 of 2023.
Currently given this environment our top ranked long ETF recommendations are: UUP, PFIX, CTA, RRH, UVXY, BTAL, KMLM, XOP, SQQQ, XLE, CORN, TUR
Prepare accordingly.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 3.90-4.32% (bullish)
UST 2yr Yield 4.29-4.66% (bullish)
High Yield (HYG) 71.07-74.60 (bearish)
SPX 3 (bearish)
NASDAQ 10,311-11,252 (bearish)
RUT 1 (bearish)
Tech (XLK) 118-130 (bearish)
Energy (XLE) 83.30-91.85 (bullish)
Financials (XLF) 30.87-34.71 (bearish) `
Shanghai Comp 2 (bearish)
Nikkei 26,705-27,784 (bearish)
DAX 12,301-13,475 (bearish)
VIX 24.52-32.24 (bullish)
USD 109.42-113.91 (bullish)
Oil (WTI) 83.14-90.01 (bearish)
Nat Gas 4.91-6.37 (bearish)
Gold 1 (bearish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
