By Peter Tchir of Academy Securities
What The Fed Did
-
The Fed sped up their taper and should be done with bond buying by mid-March at this pace. More or less priced in.
-
The Fed signaled three rate hikes, which the market seems to be absorbing well for now.
-
The press conference seemed a bit stilted to me, but Powell did seem to straddle the line between fighting inflation and wanting growth. To me, and I’m biased, I found him addressing the nation rather than financial markets in a way he hasn’t done in the past. Maybe he is trying to appease D.C., while sticking to his guns? Plausible, and I’d appreciate that, but not sure that is how it played out.
-
I think the most powerful thing he said was his view that you need very long growth cycles to really drive unemployment lower (with increased labor participation).
What the Market Did
After jockeying back and forth, risk assets started to perform extremely well during the press conference and are surging now that it is over (presumably because he cannot say anything negative at this point).
-
Bitcoin rallied from a low of $46,650, to back to over $49,000. I mention this, because I find this one particularly confusing since if the Fed was hawkish, and I argue that they were hawkish, Bitcoin is responding somewhat weirdly.
-
I’ve heard that “everyone” was short or hedged coming into this. Metrics like the Put/Call ratio and VIX support that argument, at least somewhat, as VIX has already dropped from last week’s highs.
-
Separately, hearing that 80% of Fed days wind up being positive and year-end is generally positive, so chasing those technicals could make sense.
-
The bond market’s placid behavior is likely helping as well. The 2-year yield spiked from 66 bps to 71 bps after the announcement and has drifted back to 68 bps, indicating the announcement is priced in, or we still live in an era of disbelief. The 10-year yield dropped initially (maybe hinting at policy mistake as curves flattened) but it is now up to 1.47% from 1.45% and the curve is experiencing more of a parallel shift (rather than big flattening/steepening).
-
How much is positioning? That, as mentioned earlier, seems to make a lot of sense, away from crypto, where I find it hard to believe there were a lot of shorts?
-
How much is complacency? This concerns me the most. We had a failed liftoff by Powell in 2018, and we’ve all gotten used to talk hawkish, but walk dovish.
I want to be extremely bullish on risk across the board. In fact, the reaction we are getting is what I hoped for and expected, but I thought it would require a more dovish Fed.
So
-
Either I’m blinded to what the Fed did by my pre-existing views and they are dovish.
-
Positioning was so bearish that what the Fed did, doesn’t matter (and I struggle with this one).
-
Deep down everyone “knows” the Fed won’t be hawkish even if they say they are going in that direction.
In the end, rather than cajoling investors to buy the dip, and arguing that the Powell Put is alive and well, I think we are left with the powell put, which isn’t as good and we have to deal with a variety of issues, one of which I highlighted in an earlier note.
-
Did the consumer pull forward spending to avoid supply issues and is going to slow down their spending in the coming weeks and months?
-
Have companies built up inventories (and put in orders to their suppliers) at a rate that outpaces consumer demand? (inventories are rising)
I think that the “bulls” escaped and I would be taking off risk here (even in the cyclicals, industrials, small caps, etc., that I’ve liked being overweight in), rather than adding to risk.
Credit should be ok, and the bond market probably has it about right given the tone of the Fed today (some hikes likely and that will dampen growth).
While the Fed is still adding to their balance sheet, that is almost over and while the Fed seems in no rush to actually shrink the balance sheet (Powell did assuage markets by stating that the balance sheet would remain supportive), that will be a topic of conversation. Finally, on the balance sheet, I think it is all about flow (the amount being added or reduced) rather than stock (the size of the balance sheet), though there are many at the Fed who will disagree.
So, I just can’t get comfortable that we are done with our recent volatility and I look for risk assets to give back some of today’s gains, possibly as early as tonight as the algos get shut down for a few hours and people can digest what was actually said and done today.
Good luck in what should continue be an interesting week!
