For the first time, in what seems like years, the Fed may have been relegated to the back seat. This could be wishful thinking, as I, along with so many others, are tired of marching to the beat of the Fed.
Last Friday's price action, however, seemed to solidify the view that the Fed is less important to the market. Let's look at three scenarios:
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A quarter-point rate hike will come this meeting or next. What will the market do? It yawns -- it can handle one more hike at this stage.
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A half-point hike, or more, however, seems unlikely. But if it happened, it could take us to 5.5% instead of 5%. Is that really going to influence the economy or markets that much? No.
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Will We Go to 6%? No one believes, without some extremely shocking inflation data, that the Fed is going to hike more than twice in the next four months. Inflation, while marginally elevated, has been heading the right direction and it makes sense to see how the impact of prior rate hikes and problems at smaller banks plays out. Sure, if anyone believed the Fed needs to get to 6% and the Fed put in a lot of effort to jawbone that into the market psyche, we'd have problems, but that doesn't seem likely in the near term.
So, here's my hope: We now move beyond the Fed. This brings us to the data. In particular, it brings us to jobs. If you ignore the household component of the employment survey, which is used for the unemployment rate calculations, the numbers were strong. This continues to baffle economists. While I don't try to forecast jobs data, there are a lot of very smart people who spend a lot of time and money and effort on forecasting the numbers. Is it possible that even the most aggressive estimates were far too low compared to "reality" -- where "reality" is defined as ADP and the Establishment Survey? (ADP was revamped to track the establishment survey more closely, which it seems to do). The "reality" relies on survey data, and survey response rates are very low. The myriad of people trying to estimate the jobs data rely on a myriad of methodologies and technologies. While not quite "crowd sourcing" It has an element of that. So I remain highly skeptical of the jobs data last week.
All of this brings me to Monday's key ISM data. "Services" was 50.3, barely positive (numbers above 50 represent growth while below 50 represent contraction). That was expected to tick up from 51.9, but it fell. The employment component of services, also fell, from 50.8 (hardly exciting) to 49.2, which begs the question of where are all the jobs coming from if even services seems to be in a steady state? Now, maybe hiring is so great that "steady state" is enough, but let's see.
The "good" news, is good news should be good news and bad news should be bad news, for markets.
I'm leaning toward getting bad news, on the data front, but am relieved, if I'm correct and we are trading "properly" rather than Fed dependent.
I am the closest I've been to getting fully behind this market. I'm not there yet, and I need the data to support my views, but price action and the shift away from the Fed is impressive and hope it continues. Despite the strength at the end of last week, and all the positive headlines, the S&P is only up 3.8% from April 3, with virtually all of those gains attributable to that strength. So it hasn't been a "great" market (unless you really had Nasdaq 100 only). The equal weight (as opposed to market cap weight) S&P 500 has had a small negative return over that same period.
On the yield side of the equation, I see no reason for yields to move materially higher, and the surprise would be some sort of event that pushes yields much lower.
End Notes
Finally, some quick comments on common topics:
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The T-Bill Deluge. We have concern that now that we are past the debt ceiling and the Treasury department can issue again, markets will be overwhelmed with bonds from the government. While it is true that there will be a lot of issuances, it has been well telegraphed. Many asset managers were underweight T-bills ahead of the debt ceiling, so there is "dry" powder after a dearth of issuance. Investment grade companies issued at a torrid pace last month and that should slow, freeing up asset managers to buy more treasuries. Could be a tiny headwind for markets, but not a major concern on my part.
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Recession vs. soft landing vs. no landing. In this hyper cycle news world, aided and abetted by zero-days to expiration options, it seems like we "solve" the recession risk every week or so. Only to decide it is a risk every other week. I think it is a risk and we should get data that supports that. I do wonder if the AI phenom can be enough to avert that? On the other hand, a commercial real estate deal backed by some San Francisco hotels failed to make payments recently. The CRE issue remains outstanding, though it will be very regional.
