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Powell didn’t push back enough, and so markets are now rallying hard in his face.
And given J-Pow’s lack of real pushback, markets won’t stop unless data comes in very hot (or recessionary).
The window for the soft landing narrative is now extended.
With one caveat: the narrative is very misplaced.
In this piece, we will:
Dissect the Fed meeting, focusing on Powell’s important comments about inflation and the labor market;
Scrutinize markets’ reaction, with a particular focus on the bond market;
Conclude by refreshing our actionable tactical trades and ETF Portfolio
Powell didn’t nearly push back enough, and so markets are now rallying hard in his face.
And given J-Pow’s lack of real pushback, markets won’t stop unless data comes in very hot (or recessionary).
The window for the misplaced soft landing narrative is now extended.
Picture this.
The first innings of a recession always look like a soft landing, as growth and inflation come down but not to alarming levels yet – exactly like today.
And as markets myopically embrace this soft landing narrative, Powell’s lack of pushback against easier financial conditions adds fuel to the fire.
Taking a deeper look at what Powell actually said, it becomes increasingly clear markets don’t believe him.
At all.
#1: On Inflation
‘’We need substantial more evidence to be confident about inflation returning to 2%, in particular as we see core non-housing services inflation still running at 4% annualized with no progress there’’
‘’We need to be honest with ourselves: inflation might be more persistent in this sticky category, and that means we have to do more’’
The 6-month (annualized) rate of change in core services ex-housing CPI is down to 4% - and despite the clear downward trend, Powell told us he is not happy about it.
The composition of this downward move (right chart) is indeed a bit messy: medical care deflation accounted for a large portion of it.
Despite the progress on inflation, Powell didn’t remotely sound the all-clear yet.
The bar for a proper Fed pivot remains high.
But then, why did the market rally like if a new round of QE was announced?
What’s the bond market trying to tell us here?
And most importantly, how to tactically position portfolios now?
Let’s dig in…
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Markets Don't Believe You, J-POW