Upside breakout but not in a good way
Equity futures are under pressure following yesterday’s Fed meeting. My view is that the reason for the weakness in futures this morning has more to do with the upside breakout of the Ten-Year Treasury versus anything the Chairman said at his press conference.
The Fed increases their projection of growth and inflation but more as a mark-to-market exercise versus a change in their future view. The Summary of Economic Projections (SEP) or better known as “The Dot Plot” indicates that the committee still sees one more hike this year, but the median of the committee projections now foresees only two cuts in 2024 as opposed to four previously. The Dot Plot is a forecast and as Chairman Powell said yesterday, “Forecasters are a humble lot with much to be humble about.” Chairman Powell is always eager to remind us that the projections are essentially meaningless because the Fed is data-dependent, again, as always. No decision about November or next year has been made. Just like the rest of us, they are going to analyze the data as it comes in.
The concern of the market is not so much the Fed as it is the Treasury. It is Janet Yellen and not Jerome Powell who decides whether to issue bills, notes or bonds and it is Yellen that recently decided that after an extended period of reliance on short term issuance, the Treasury in coming months will sell longer dated securities. Supply matters and supply is going higher.
We remain of the “Higher for Longer” view: the economy and consumer demand will continue to plug along at a slow growth pace but not weak enough to beget a spike in layoffs and meaningfully lower corporate spending and therefore inflationary pressures will remain too high for the Fed to shift to cuts. That said, my concern is that if I’m wrong, the risk is to the economic downside as opposed to a re-acceleration of the economy. Cost of capital and the availability of capital still matter, but the lags to monetary policy will be longer in this cycle given the credit insensitivity of consumers with low-rate thirty-year mortgages, accumulated wealth in the top economic cohorts, excess fiscal spending, and the credit insensitivity of corporations with termed out debt. To be clear, the lags are longer, which is not to say irrelevant.
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