Breaking News
Investing Pro 0
New Year’s SALE: Up to 40% OFF InvestingPro+ CLAIM OFFER

Fed Unlikely to Relent on Its Messaging Despite Falling Inflationary Indicators

By David MoenningMarket OverviewJan 23, 2023 01:36PM ET
www.investing.com/analysis/fed-unlikely-to-relent-on-its-messaging-despite-falling-inflationary-indicators-200634626
Fed Unlikely to Relent on Its Messaging Despite Falling Inflationary Indicators
By David Moenning   |  Jan 23, 2023 01:36PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

With the exceptions of an ugly day/afternoon here and there, the tenor of the market appears to have improved so far in calendar year 2023. And with both the "Santa Claus/Year-End" and the "First Five Days" indicators positive, investors can't be blamed for looking on the bright side these days.

In reality though, you can probably dispose of all the historical analogs, analyst outlooks, and group-think predictions into the nearest round file as the next major trend - in either direction - is likely to be driven by the outlook/expectation for the state of the economy.

From my seat, this will likely wind up being a matter of timing. As in, will the economy hold up long enough for the Fed to recognize that inflationary pressures are falling so that they can pivot away from their antagonistic mode?

Or will John and Jane Q Public decide to put their collective heads in the sand and stop spending in anticipation of the most predicted economic recession in history?

To be sure, monetary policy works with a significant lag, (the thinking is approximately 9-12 months). In short, this is why most every analyst on the street is calling for a recession in the second half of 2023. The Fed started tightening aggressively last spring and then hiked hard for the next 2 quarters, so naturally everybody assumes that the negative impacts on the economy will show up sometime in late summer/early fall. Makes sense.

However, so far at least, consumers aren't buying the doom-and-gloom inflationary/pain scenario the Fed is selling. Let's face it; with gasoline prices back at reasonable levels, home values up nicely, and plenty of cash on hand - thanks in no small part to the government pumping $10 trillion or so into peoples' checking accounts - the John Q Public family hasn't really changed any of their spending behavior.

Speaking generally, of course, Corporate America is in a similar position as it relates to their balance sheets. I'm not sure which particular stat is the most accurate, but it looks like there is a bunch of cash on hand here. And the bottom line is if companies have cash available it is much easier for them to weather any storms that may blow in (hurricanes, or otherwise).

And this, dear reader, is why I am struggling to buy the bear argument here. If this is a recession, I'll take it! Give me this type of recession every single time going forward, please!

This is not to say that investors should expect nothing blue skies ahead. No, there is still a fair amount of uncertainty out there on the economic/macro front.

And lest we forget, the Fed is on a mission. As I've opined for a couple decades now, it is important to recognize that the Fed tends to get what they want - especially when they are "on a mission."

This means we should NOT expect any "pivot" messaging from even the most dovish Fed officials. No, their message has been clear: "Hike fast and hard. Then hold rates high for a LONG time. Do not waver. Hold firm and stay the course - until inflation returns to target."

Remember, "messaging" is one of the Fed's 3 tools. And right now, this tool looks like a hammer. So, while our inflationary pressure indicators are falling hard and are currently in the "mile disinflation" zone, the Fed is unlikely to relent on their messaging.

Yes, they see the same data we do. And no, they aren't stupid. Nor are they being "stubborn" here. The gameplan for Powell & Co is simple. Don't waver. Keep up the hawkish narrative as long as possible in order to keep the inflation expectations genie trapped in the bottle. Right now, nobody is thinking, "gee, I should buy this now because it's just going to get more expensive later." And this is what the Fed wants.

It is also clear that the markets don't believe the Fed will keep their word here as the futures continue to project that the Fed Funds rate will start to fall in the back half of 2023 - regardless of what the FOMC officials are saying in public.

Getting back to the "timing" issue, I believe the key question is how soon inflation will begin to decline "enough" for the Fed to be reasonable and avoid wrecking the economy. Cutting to the chase, IF inflation pressures continue to fall, then the Fed is likely to back off and the economy could very well be just fine.

But... If something comes out of the woodwork to cause inflation to stay "sticky high," then there could be trouble and the economy could easily experience a "real" recession. Again, for me, it's a matter of timing.

My take is the timing situation looks favorable right now and that a soft(ish) landing is the base case here. So, from my perch, this means that stocks may, at some point, begin the process of looking ahead. We shall see.

Now let's review the "state of the market" through the lens of our market models...

Primary Cycle Models

Below is a group of big-picture market models, each of which is designed to identify the primary trend of the overall "state of the stock market."

Primary Cycle Models
Primary Cycle Models


* Source: Ned Davis Research (NDR) as of the date of publication. Historical returns are hypothetical average annual performances calculated by NDR.

Trend Analysis:

Below are the ratings of key price trend indicators. This board of indicators is designed to tell us about the overall technical health of the market's trend.

Price Trend Indicators
Price Trend Indicators

Key Price Levels

  • S&P 500 Near-Term Support Zone: 3890
  • S&P 500 Near-Term Resistance Zone: 4015
  • S&P 500 50-day Simple MA: 3928
  • MA Direction: Rising
  • S&P 500 200-day Simple MA: 3968
  • MA Direction: Declining

Market Momentum Indicators

Below is a summary of key internal momentum indicators, which help determine if there is any "oomph" behind a move in the market.

Market Momentum Indicators
Market Momentum Indicators


* Source: Ned Davis Research (NDR) as of the date of publication. Historical returns are hypothetical average annual performances calculated by NDR.

Early Warning Indicators

Below is a summary of key early warning indicators, which are designed to suggest when the market may be ripe for a reversal on a short-term basis.

Early Warning Indicators
Early Warning Indicators


* Source: Ned Davis Research (NDR) as of the date of publication. Historical returns are hypothetical average annual performances calculated by NDR.

Fundamental Factor Indicators

Below is a summary of key external factors that have been known to drive stock prices on a long-term basis.

Fundamental Factors
Fundamental Factors


* Source: Ned Davis Research (NDR) as of the date of publication. Historical returns are hypothetical average annual performances calculated by NDR.

Thought for the Day:

The difference between the impossible and the possible lies in a man's determination. -Tommy Lasorda

Fed Unlikely to Relent on Its Messaging Despite Falling Inflationary Indicators
 

Related Articles

Fed Unlikely to Relent on Its Messaging Despite Falling Inflationary Indicators

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.
  • Any comment you publish, together with your investing.com profile, will be public on investing.com and may be indexed and available through third party search engines, such as Google.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (3)
Kevin Wilkie
Kevin Wilkie Jan 23, 2023 5:56PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Markets do not believe Powell. Rally to 5k+ S&P
Peter ONeill
Peter ONeill Jan 23, 2023 3:29PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Inflation is mainly falling as both energy and wages have priced in a recession this year (neither due to increased supply - War with Russia has severely impacted global energy supplies, China Covid policy has restrained demand, while unemployment is at 3.5% with over 10+ million open roles). No recession = inflation rises again = Fed will need to do more to stop inflation from getting entrenched at over 4%. THE ONLY reason this current rally makes sense is as still FAR too much fed QE printed money floating around with Fed Balance sheet still at over $8.5 Trillion versus $3.7 Trillion pre covid.
Kris Jay
Kris Jay Jan 23, 2023 3:16PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
very very narrow chance for a soft landing.  Schwab has said this too.  given the miss on calling inflation transitory, i have no confidence that the FED can engineer a soft landing.   I'm in El-Arian's court, inflation will be sticky and unemployement will be low and wages will go up.    Seen it before.  the labor issue is not tied to supply chain problems or growth, simply less people want to work in traditional jobs that you have to show up to work for.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email