By. John Caruso

We heard from a host of Fed-Heads yesterday, and all of which were hawkish including the head-honcho himself, Jay Powell.  We heard plenty in terms of supply side problems of which the Fed has no control – Neal Kashkari sounded like the most clueless of the bunch.  I think we can all conclude that MMT was a massive failure. 

Powell highlights:

POWELL: WE WANT FINANCIAL CONDITIONS TO TIGHTEN SO THAT SUPPLY AND DEMAND ARE BETTER BALANCED AND INFLATION GETS BACK DOWN

… negative wealth effect/slow down growth

POWELL: WE WILL HAVE TO SLOW GROWTH TO ACHIEVE A SOFTISH LANDING

 …. Softish now eh?

POWELL: RIGHT NOW IT FEELS LIKE THE NATURAL RATE OF UNEMPLOYMENT IS WELL ABOVE 3.6%

…. Now he’s talking about his Feelings?

POWELL: THE RESULT OF OUR ACTIONS MAY NOT BE A PERFECT LABOR MARKET, BUT STILL STRONG

…. Layoffs are coming, and have already begun

POWELL: I WOULD LOVE TO SEE A LABOR MARKET MORE IN BALANCE

…. Code for a higher unemployment rate

POWELL: WE WANT THERE TO STILL BE HEALTHY WAGE INCREASES BUT AT A LEVEL MORE CONSISTENTT WITH 2% INFLATION

…. Middle Class – Welcome to the Hotel California, you can check out anytime you’d like but you can never leave

POWELL: SEE SOME SIGNS THAT ARE PROMISING ON INFLATION, OTHERS NOT

…. You don’t say…

POWELL: THERE COULD BE ECONOMIC PAIN INVOLVED TO GET INFLATION DOWN

…. Really?

So all-in-all, I’ve no idea how they’re going to pull this off.  Growth is clearly going to be a casualty of the Fed fighting inflation, but to what degree?  I expect at some point in the relatively near future, the focus will veer away from inflation and focus will then be on growth.  I showed you the “Angst Line” in Corporate Credit vs Investment-grade aka Treasury Bonds.  As earnings continue to deteriorate from here, you’re going to see credit spreads begin to widen vs US Investment grade/Treasury Bonds (we’re already seeing it) and eventually blowout – that’s a signal of default risk.  High yield spreads widened last week alone by 50bps to 98bps in the last month….that cannot be ignored.

Another headline I caught yesterday was that the US Government has granted Chevron permission to negotiate with Maduro of Venezuela – I’d say Washington D.C. has reached “peak desperation” in there attempt to control energy prices.  Still worth keeping an eye on this. 

Stocks: building IVOL discounts and immediate OB currently.  Still runway for a little higher into the range high, but those continue to fall day/day – continue to sell rally’s in equites.  Volatility is also now immediate OS, and nowhere near a breakdown of its bullish trend. 

Currencies: we’ve got a host of immediate OB signals in currencies vs USD, Canadian, British Pound, Euro, Yen, etc. 

Gold: moving back under trend today.  Gold, like many other assets remains in the “throw away” phase.  Got to watch it here, because nothing is bullet proof in this market – what Gold really needs from here is for Treasury Yields to begin falling.    

September 2023 Eurodollar Futures are now signaling positive momentum and close to immediate OS, but still an egregiously bearish trend – the bond market has a lot of “bearish forces” to sweat off from here. 

Good luck,