Market Note

Despite all the media hand wringing over the debt ceiling, markets don’t seem to be trading off of it. The focus is much more on monetary policy and the banking system.

What debt ceiling? US stocks are up over 2% as I type. Dow +600. The media obsession is plainly politically biased. Wall Street wants more inflation and any federal budget restraint gets in the way. The only objective evidence of market interest is at the extreme short end of the bond market yield curve. If the markets seriously thought there was a genuine risk of default, both stocks and bonds would be swirling down the porcelain receptacle.

But corporate media reporting on monetary policy has been even more abjectly biased. As a concrete example, reports following yesterday’s FOMC decision focused sharply on the removal of the statement language “The Committee anticipates that some additional policy firming may be appropriate …”. The rush to conclude the Fed effectively announced a halt to rate hikes is reflected in today’s market action. Wall Street through its media mouthpieces apparently persuaded the public to buy more stocks. Why not? That’s how it makes money. But the pretense of unbiased media is inexcusable. Even outlets that accurately reported it as breaking news summarized it as a pause in endlessly reverberating recaps.

What actually happened? The above language was not just wholesale removed, but rather replaced with “In determining the extent to which additional policy firming may be appropriate …”. To sum up:

March: “The Committee anticipates that some additional policy firming may be appropriate …”.

May: “In determining the extent to which additional policy firming may be appropriate …”

What does that sound like to you? Does it sound like the FOMC just excised all reference to further hikes? That it signaled it was done hiking rates?

The media’s reporting of what the Fed said differs materially from what the Fed actually said. You had to actually read the statement to find out. Powell in the post meeting press conference likewise said nothing to signal they were done tightening. He was firmly in ‘I don’t know’ territory.

Which is as it should be. A lot can happen over the next several weeks.

This isn’t about the substance of what the Fed will do … as it happens I think there’s a good chance this was indeed the last hike of this cycle. It’s about the poor excuse for financial journalism that most of the public is exposed to. The objective is not to report, but to manipulate … Wall Street uses the media to sell product and to lobby for the outcomes it wants. Predicting an outcome and creating expectations is a subtle form of pressing for it. Never, ever, assume mass media news reporting is anything other than a running infomercial.

Even if I expect the same policy outcome financial media lite predicts, the market repercussions are far different. The media playbook is that the Fed’s done hiking and will soon turn to cutting. I can go along with that, too, especially based on the verdict of the bond market as seen in the yield curve. Where we part ways is in the stock market script. Theirs says stocks will soar, the weight of restrictive monetary policy having been lifted. I have a different script. It asks what economic and market conditions would prompt such an about-face from the Fed. And my answer is some kind of wreck in the financial system or material economic setback, hardly bullish for stocks.

When has such a profound and lasting inversion of the yield curve not been followed by some such thing?

As always, the short term is more of a crap shoot. The stock market could well continue to rally while the yield curve remains inverted. It’s when the yield curve begins to uninvert and the Fed begins to cut rates that the most imminent bearish signal occurs.

Personally I have a substantial allocation to stocks and am not dumping them. But I sure as heck am not rushing out to buy on the media’s ‘the Fed’s giving us the all clear’ story.  If anything, the Fed needs another leg down in stock prices to succeed in its quest to quell consumer price inflation. Wall Street media say stocks will go up because the Fed will soon be easing. I say that’s cart before horse … the Fed will cut when stocks go down.