Do you remember what Larry Summers said last year about soft landing?
This story of second marriage and the triumph of hope vs. experience seems to find an echo at the FED level...
According to Bloomberg chief economist Anna Wong, online betting markets see a 69% chance of a federal government shutdown starting Oct. 1st
So what could be the effects on the US economy and job market? Below chart shows the effects on GDP depending on the duration of the shutdown. - According to Goldman, a government-wide shutdown would reduce quarterly annualized growth by around 0.2% for each week it lasted after accounting for modest private sector effects. Goldman's baseline is that a shutdown could last for 2-3 weeks (the Trump government shutdown, the longest in history, lasted 35 days, from Dec 22, 2018 to Jan 25, 2019). - Meanwhile, Bloomberg also speculates that in an extreme tail event, the maximum hit to 4Q GDP would be a drag of 2.8% if the shutdown lasts for the entire quarter. Source: Goldman Sachs, Bloomberg, www.zerohedge.com
How to trade equity markets following the LAST FED rate hike?
BofA Harnett says it depends whether the economy is in inflationary or an inflationary period. When monetary policy needs to work harder to slow economy in inflationary era (e.g. 1970s/1980s), Dow Jones returns were most of the time negative in the 3 months and 6 months that followed the last Fed hike... However, in disinflationary period, markets returns were quite strong. So do you believe we are in an inflationary or disinflationary period? Source: BofA Global Research
The Fed's balance sheet hit its lowest level since June 2021 this week, down $941 billion from the peak in April 2022
Changes in the Fed's balance sheet since 2002... Source: Charlie Bilello
In case you missed it: now that the Fed's blackout window is over, everyone said the same thing in the days that follow the FOMC meeting: "higher for longer":
*FED'S COLLINS: FURTHER FED HIKES 'CERTAINLY NOT OFF THE TABLE', EXPECT RATES MAY HAVE TO STAY HIGHER FOR LONGER *FED's BOWMAN: MORE RATE HIKES LIKELY NEEDED TO GET INFLATION TO 2%, NEED TO REPEAT MONETARY POLICY ISN'T ON PRESET COURSE *FED'S DALY: I DON'T GET TO A POINT WHERE I'M READY TO DECLARE VICTORY, UNLIKELY INFLATION WILL REACH 2% GOAL IN 2024
Maybe this is why Powell said that a soft landing is not the core scenario...
Recession confirmed?
The worst weekly performance since March for the sp500...
Markets like clarity and hate confusion. The first half of the year was about disinflation + AI buzz. Now the markets are not sure about what's next. And some of the confusion seems to be coming from central banks... This week we got a very confusing message from the #fed: a pause in rates, higher dot plots in 2024 but also calling a soft landing NOT a base line expectation, hence sharing fears that keeping real rates for a long period of time creates some downside risks for the economy and the markets... The combo higher inflation risk + downside growth risk is not a great value proposal for Mr Market at the time you can nicely paid by keeping your assets in money markets funds... Source chart: Bloomberg
BOJ Update
Japan | BOJ left its monetary settings unchanged and offered no clear sign of a shift in its policy stance, putting a damper on market speculation over the prospects for a near-term interest rate hike and adding pressure on the yen. The Bank of Japan kept its negative interest rate and the parameters of its yield curve control program intact on Friday in an outcome predicted by all 46 economists surveyed by Bloomberg. It also maintained a pledge to add to its stimulus without hesitation if needed, a vow that offers yen bears a reason to keep betting against it. Japan’s currency weakened as much as 0.4% after the decision to around the 148.20 mark against the dollar. This helped stocks, which trimmed about half of their losses for the day. The benchmark 10-year bond yield was down half a basis point from Thursday’s closing level at 0.74%. Source: Bloomberg
