A shift in the macroeconomic narrative is starting to develop.
The market has been dealing with intense inflation and the Fed's attempts to bring it under control with interest-rate hikes and increased hawkishness. There is some hope that inflation has peaked, but there is no clear indication of that so far.
Meanwhile, in the last two weeks, there has been a major collapse in the retail sector as forward guidance has been cut aggressively, and stocks in the sector have collapsed. Walmart (WMT) , Target (TGT) , Dick's Sporting Goods (DKS) , Best Buy (BBY) , Snap (SNAP) , and so on are acting like a recession is about to hit.
Many economists still insist that a recession is unlikely, but interest rates are starting to fall, and the chances of two half-point hikes from the Fed at the next two meetings are starting to decline.
Bonds tend to gain strength, and interest rates decline as worries about a recession increase. What many market players are looking for now is a shift in the Fed to deal with the recession issue. There has already been one hint from a Fed member that maybe a pause in rate hikes would be possible in September.
A less hawkish Fed would obviously be positive, but the problem is that it means they are counting on a slowing economy to help tame inflation. The big question for investors is whether or not the market has already discounted a potential recession. Based on what has happened in retail the last two weeks, the answer is a resounding "no" but keep an eye on the sector for signs of support.
As I've mentioned several times lately, one of the big positives is that the number of new 12-month lows is not building. We have seen a decline from 3,000 two weeks ago to just 200 Wednesday morning. Thousands of stocks are holding above lows, and that means that there is some support.
We are shifting from a market focused on inflation to one that is more concerned about a recession. That still is very hard to discount, but it may result in a less hawkish Fed, which the market is likely to celebrate, at least in the short term.
I'm looking for some short-term upside as we digest the minutes of the last Fed meeting. I'll be watching to see if the economic narrative continues to shift to support a less hawkish Fed.
