In today’s FS Insight First Word Note, we discuss how the market reacted hawkishly at the FOMC last week, but the key is still inflation, and we believe that inflation is on the glide path. Masu. Based on past research, the stock is likely to do well in the fourth quarter based on this year’s price trends.
Click here to watch today’s Macro Minutes (duration: 9:06).
Last week was a high-profile week for central banks, with policy decisions made by major central banks including the Federal Reserve, Bank of England, and Bank of Japan. Since Wednesday, volatility has focused primarily around Wednesday’s FOMC decision, with the S&P 500 index down 2.8% and the U.S. 10 Yearly bonds have soared since Wednesday.
Equities last week saw the biggest outflows of 2023, according to EPFR data, highlighting the “vortex of pain” investors are currently in. We believe that the “secular Fed rally” has less to do with inflation and more to do with it. “Increase in GDP” or strengthen the economy. Therefore, we view this post-FOMC decline as excessive.
After all, the Fed operates under a dual mandate of maximum employment and price stability, so it is questionable whether real GDP growth is a concern for the Fed. Inflation is the Fed’s main focus, and it expects inflation to continue to fall on a glide path. This is one of several reasons why we can remain positive through the end of the year.
– There are a number of economic indicators that will impact the market this week, but we believe the most important of these is August’s PCE.
— 9/26 9:00 AM Case-Shiller Home Price Index <- Important updates on the housing situation
— 9/26 10:00 AM Conference Committee Confidence/Inflation Expectations <- Looking forward to “tame” expectations
— 9/28 8:30 AM GDP <- Bears take note when Fed is quoted at FOMC
— 9/29 9:30 AM PCE <- 0.20 Street looking for core MoM
— 9/29 10:00 AM UMich Inflation Expectations <- Important to see how rising gas prices affect expectations
*The market has been under significant pressure since early September. Rising yields are particularly hurting stocks, as the US 10-year bond has hit 4.5%, its highest local price since last Thursday. We see this rate increase as a reaction to major central bank policy decisions over the past few weeks.
*We have outlined below the reaction of stock prices and yields following the central bank’s decision.
— First, the ECB added 25 bps, but signaled the end of the rate hike cycle <- Stocks initially took this positively, but fell the next day
— Fed “paused” but announces relatively “hawkish” (according to consensus interpretation) SEP for 2024 <- Stocks fell, interest rates soared
— BoE suspends policy for the first time since late 2021 <- Stock prices continue to fall, with the US 10-year bond yield nearing a 17-year high of over 4.5%
— Bank of Japan decides to maintain “ultra-easy monetary policy” but notes “extremely high uncertainty” in the economy <- Stocks tried to recoup losses endured this week, but on Friday Ends negative by closing price
— Do you understand the “vortex of pain” that investors are currently in? The sell-off continued relentlessly.
*Our view is that the overall picture of Fed policy has not materially changed. Powell said the Fed’s SEP is simply a compilation of individual forecasts from 19 FOMC members. And even if the Fed had a crystal ball, it actually lowered its FY2023 core PCE estimate and left its FY2024 core PCE estimate unchanged. This confirms that there has been significant progress on inflation since last September.
*The FOMC’s policy rate forecast was raised by 50 bps (less cuts were made two times) due to the rise in real GDP growth. We wonder: Does higher real GDP growth (and therefore a stronger economy) mean a recession is avoided? Or does the market support lower federal funds rates even at the expense of a contraction in the economy? Do you like it? Mr. Powell actually answered this.
— Q: If GDP continues to perform well even though inflation has not flared up again, is that in itself a reason to consider further tightening?
— A: …GDP is not a mandate…The question is…is the heat we’re seeing in GDP really a threat to our ability to recover 2% inflation? …It’s not about GDP per se.
–In other words, the battlefield is still inflation.
*Many people are paying attention to the Fed’s FOMC. But another factor last week was the Fed’s balance sheet release.
— Last week, the Federal Reserve slashed its balance sheet by $75 billion, the largest weekly decline since the start of QT.
On the asset side:
–$48 billion of the savings came from repayments of bridge loans induced by local banks
–$26 billion of the reduction comes from sales of government bonds and MBS holdings
In terms of responsibility:
— Reverse repos reduced by $41 billion
— Bank reserves decreased by $166 billion.
–TGA balances increased by $124 billion
— So for us, quantitative tightening operations may also have partially contributed to the decline in US Treasuries (yields rising).
*Near-term headline risks loom as the end of September approaches.
— UAW strikes currently underway
— Possible government shutdown
— These are not “fundamental changes” for the stock market, but important to monitor given the “fragility” of the market in recent months.
* This tweet that caught our eye over the weekend stated:
— Since 1950, the S&P 500 has gained more than 10% from January to July (as it did this year)
— However, it is negative from the end of July to September 23rd (same as this year)
–4Q results are trending favorably.
— Out of eight cases, stock prices rose an average of 7-8% in the fourth quarter.
— The winning rate is an amazing 100%.
— That’s very constructive.
Bottom line: Despite near-term headline risks, we remain positive through the end of the year as we believe inflation remains important and on the glide path.
Chairman Powell even acknowledged in a press conference that “a soft landing is the main goal,” so the Fed doesn’t have to actually destroy the economy if inflation is on the right track. Although the market has endured a downturn over the past few months, the consequences of history suggest that it could pick up in the fourth quarter.
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