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Markets May Be on the Wrong Side of the Fed Again

Published 11/25/2022, 04:04 AM
Updated 09/20/2023, 06:34 AM

Jackson Hole was a pivotal moment for markets; as Federal Reserve Chair, Jay Powell indicated, he was earnest about getting inflation to cool off, and it was going to be a long and challenging road ahead. The markets got the message loud and clear, resulting in a massive decline over the next several weeks.

But since that October low, the S&P 500 has increased sharply, almost 16%. It has yet to reach the massive gains witnessed in August, where the S&P climbed by nearly 19%, but the gains are still enormous. The significant increases have resulted in a considerable easing of financial conditions, likely to pressure Powell to confront the markets again on Nov. 30.

Financial Conditions Have Eased Too Much

What makes this Nov. 30 speaking event at the Brookings Institution all the more interesting is that financial conditions have eased back to levels that were last seen in August heading into Jackson Hole, and by one measure easier than at Jackson Hole.

The Chicago Fed National Financial Conditions Index (NFCI) and Adjusted NFCI show that conditions have eased dramatically from being restrictive back to being accommodative. The Adjusted NFCI has fallen back to its August lows, but the traditional measure has fallen below its August lows.

NFCI Vs. S&P 500 Daily

This is a problem for the Fed and potentially why Jay Powell will need to deliver a more hawkish message to markets at the end of November. The Fed transmits monetary policy through verbal guidance and rate hikes; this results in financial conditions easing or tightening. The Fed has made it clear that its monetary policy needs to be restrictive. The data showed that the policy had become restrictive in late October and early November. However, since the CPI report, that has all changed.

The October CPI Report May Have Given False Hope

The CPI report gave investors hope that the US has seen peak inflation, and that may very well be the case, or it may not be the case. The October CPI report had a hidden fact that many investors may have overlooked due to a change in the health insurance costs, which had to do with a technical change in its calculation. This change will not be reflected in the PCE and Core PCE results when they come out on Dec. 1. Currently, estimates for PCE are for it to rise by 6% year on year (yoy), while core PCE is expected to increase by 5.0% yoy.

Jay Powell needs to re-emphasize on Nov. 30 the Fed's commitment to raising rates to bring inflation down through tighter financial conditions and that one CPI will not be enough to suggest the Fed's job is done.

Latest comments

My thoughts are he's going to dovish. I believe he's going to keep it open ended. The FED knows if they crash the market they'll wipe out the 401ks retires are living of. That would be devastating as their the ones with cash to spend. Inflation doest affect them much. But, a market crash would.They don't have enough young people to replace the jobs retires left. Still a strong job market. A situation that really is something never experienced before. just mypo
All the commodities prices are back to where the inflation started. Thoughts?
Let’s see if Powell tell people feel more pain or more free money on wed we al never kbow
oh oh Mike's calling the top..which means=markets going higher.
hmm, didnt seem to go higher today.  nice try though.
Isn't it a widely accepted fact that the Fed had been on the wrong side of itself when it thought in 2021 that the Inflation then was transitory?
Powell should just say “Gonna burn it all down” then drop the mic and walk off stage
I bet you are what they call a hodler. take your vitamins and flex 💪
personally, I think Powell sticks to his word even if it is to his detriment. I think he will wait for lagging indicators for a hard landing. but maybe he has learned from his previous mistakes.
cc
Powell likely repeats pivot is premature.
The U.S. rates usually follow Europe and Asia rates
I believe everyone should take everything this FED president ventilates with a grain of salt. He held muni bonds privately while the FED at the same time bought them officially. So he can be seen as corrupt by design. Furthermore, he was wrong 2021, sleeping at the wheel and right most of 2022, so he can be expected to be wrong again in 2023. He seems to prepare for 2023 with the mistake of hiking only 50 basispoints
I concur .
The article might make sense if Powell actually had a spine and knew what he was doing. He is the reason we are where we are and won't be the reason we get out of it.
So you think he has done a great job? You probably think that Hunter's laptop is Russian propaganda and that masks really work. And I can guarantee I have traded longer than you and made much more money.
 You are hilarious! Thanks. I am assuming you are still in school and just having some fun. That is great, stay in school and listen to your parents!
did you forget about inflation being transitory? All those PhD’s at the fed, yet everyone got it completely wrong. My 10 year old daughter could see it was not transitory, so I don’t believe for a second the Fed knows what it’s doing
Nonsense its not Jpow or the feds job to worry about the stock market. Its not his job to even try to control it. Rates have not dropped therefore monetary policy has not become more accommodating. You are simply obbsessed with these lose connections you prop up to be vital when in reality they are not.
You got it
You're right, but the article is referring to the fact that financial conditions are loosening because of this very optimistic stock market, and this tend to make people spend more money. This makes the Feds job harder, and Powell might need to be even more hawkish to cool the economy down.
Why does Powell need to re-emphasize anything like that? Because you are short and you think you are right? Market sure not acting like you are right
Exactly, Jpow himself said inflation is currently running at 5.1% last speech and they are targeting 2% in 2 years not 2 months
BINGO Jason
Agree except for "may be".
If they really want to set a hawkish tone why are they not doing 95B QT per month? Instead of that they keep inserting liquidity to the markets
Because the FED is not deliberately wanting to cuase more damage than necessary. They are not seeking to drop the stock market deliberately unlike our perma bear short friends.
fed on camera hawkish behind minting wealth by misleading unskilled traders and so called retail investors.
The FED has also hiked what their goal was at warp speed, they may take a slower approach, especially goven last CPI report, you chased puts at 3500 and are getting obliterated.
Michael Kramer blown out after calling an all in short at 3500
ouch
The FED talking a tough game because they need to won’t scare the markets. Will be data dependant from here.
FED has hiked what it wanted to do successfully with superfast pace and it might be too much earlier than their original plan. Now, FED may adopt a slower pace or even pause as they knew from their old records how much time it takes for the rate hike effect to show its results and FED need not depend on the immature data.
its also possible that the Fed's handling of this is superb despite being wrong throughout 2021.  that is, the current rates are enough to take a 1/2% off of inflation each reporting period and upcoming 50bps hikes are enough to continue that trend while keeping markets and economy functioning reasonably.   its not what i had predicted, expecing Powell to screw up again,  but this call that markets will drop (since 11/20), hasn't panned out.  Agree that if Powell comes on strong and hawkish on 30th we will have a dip,  but not horrible as traders are expecting CPI on Dec 1 to be same or lower.   Only way for market to go down is the narrow window of Powell saying Dec hike will be 75bps if a very high CPI number on Dec 1, and in fact CPI does come in high.   Other than that, market will continue on to at least 4100, maybe 4200-4300 by year end.  Nothing is majorly broken that would cause a huge sell off.  Maybe in 2023 if conditions get worse as predicted, including housing.
i would love to be wrong as I am short based on prior technical charts you showed expecting market to go down, and it has only risen in a straight line since 11/20.
 i dont disagree really but that is far out ( in my short term view) in 2023, maybe October 2023.  so there is lots of room to play rising SP500.  I just lament on being short, thinking it was different this time ( no santa clause rally, no rally post midterms with divided congress, etc) based on Mike's 11/20 post.  and i was wrong to follow that, even knowing Mike Wilson of MS had predicted 4100 by year end.  So market will go down at some point, just painful to watch position go south and then waiting for market to go down just to recover and get back to even.  Opportunity cost of making some return and large risk with no gain.
Fed hikes mean nothing if market ignores them.
thank you very much, very clear and interesting!
says Michael Kramer .... lol oh boy u are one arrogant fella
Anyone calling someone else arrogant is by definition arrogant themselves.
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