Markets are caught in this struggle between what the Fed wants to do:
1. Set expectations for a terminal rate above 5%.
2. Set expectations that they won't cut for a long time.
3. Set expectations that they will suffer some economic slowdown for a period of time before adjusting their strategy.
4. Remind everyone that suddenly they are "'experts" on market values (after claiming that was outside of their scope for decades) and want markets to know they are watching "financial conditions" (aka stocks and to a less extent, bonds) and will try and talk them down.
That is what the bulls face and it is a big hurdle!
But there are a few things helping the bull case:
- While jobs were strong, the wage pressure seems to be easing, which should quiet down the Fed.
- The last 2 months of inflation data have been good. Not better, but actually good. Another benign print on CPI on Thursday (I see no reason why it won't come in at or below expectations of 0.3% for core).
- The Services number was nothing short of scary!
I remain convinced, that as we emerged from Covid, the combination of pent-up demand, stimulus checks and attempts to deal with shortages caused a surge in goods buying that was not sustainable.
I think we will see the same thing in travel where the surge started later (partly due to rules, but also partly because many people were more cautious about traveling and many businesses were slow to re-instate travel budgets -- until they started seeing competitors who travelled, win deals.
The wealth effect (especially in and around "disruption") and the slowdown in goods, followed by a slowdown in services is my base case, and it seems to be playing out.
Look for Powell to talk tough Tuesday, but add if you sold some on the recent pops and stay the course on risk into and after CPI.
From my seat, this market is trading as though too many people are short/underweight, which supports a bounce, but this market also seems to switch from overbought to oversold with record speed and we don't want to overstay our welcome.
