The latest weekly Synthetic Systems.
Fed chair Jay Powell lowered the boom on the stock market at Jackson Hole last Friday, slicing 1000 points off the Dow Jones Industrials. I can’t recall a more unambiguously hawkish speech from a Fed chair. Powell not only quoted Volcker three times but echoed Dragi’s “do what it takes…”, for all intents and purposes saying aggressive rate hikes will continue until the markets have been beaten into submission.
This Monday Wall Street is treating it as if it was all just a bad dream. Stocks are down as of this writing, but only modestly so. This will not be sufficient to satisfy the FOMC’s determination to tighten “financial conditions”. Expect more hawkish commentary from Fed officials over the coming days. If that’s still not enough, the FOMC will go nuclear at its next meeting September 21.
Synthetic Systems by the way knows nothing about this. So it’s interesting that it nevertheless has penciled in a dramatic market inflection for that time frame.
What a remarkable chart with respect to bonds. It’s even more remarkable given that the Federal Reserve is scheduled to greatly accelerate QT in September and October. So we are about to see an enormous increase in the supply of Treasury bonds.
Same reaction here, kbird. Bear in mind though that the Bonds plot is of theoretical perpetual bonds; actual Treasuries are a little more muted in both directions. The Vanguard extended duration fund EDV comes quite close to the Bonds plot, TLT and VGLT noticeably less so, GOVT less still, sitting roughly midway between Bills and Bonds.
That bonds could rally significantly at all under QT might seem counterintuitive, not to mention at odds with the Fed’s stated rationale, though it wouldn’t be unrealistic. As long as the Fed isn’t taking over the whole market, non-Fed activity drives bond prices at the margins, and investors zig when the Fed zags, becoming more risk seeking when the Fed is doing QE, with the result that investor money moves from bonds into stocks. Under QT, the opposite can happen … investors become more risk averse, moving money from stocks into bonds, putting upward pressure on bond prices. If you look back over the history of the Fed’s QE-QT, the correlation between Fed buying/selling and bond price increases/decreases isn’t there. Instead it correlates more closely with stock prices. Whether we actually see that this fall of course is still an open question, but it’s happened before and SS apparently thinks it will again.
Investors also front-run the Fed … at least what they think the Fed will do. That they expect the Fed to sell more aggressively in the near future better explains recent market behavior than predicts future behavior. Bear in mind that the Fed’s plans can change … it would hardly be the first time…
thanks, as always, for sharing your work.
This take on the economy is remarkably consistent with the SS outlook.
https://www.marketwatch.com/story/economist-predicts-a-whopper-of-recession-in-2023-and-thats-not-necessarily-due-to-higher-interest-rates-11661888255
Another take that lines up:
https://www.marketwatch.com/story/prepare-for-an-epic-finale-jeremy-grantham-warns-tragedy-looms-as-superbubble-may-burst-11661988022