Wall Street media’s bullish hook of the week: The long awaited, often declared Fed “dovish pivot” is finally here. Yes, this time … really. Fed speakers indicate rising bond yields are doing most of their work for them, so more actual policy tightening may not be needed after all.
Translation: The Treasury market crash is making the Fed squeamish, and it doesn’t want to throw salt on the wound by continuing to pound the higher for longer talk.
There’s just one problem with that. Whatever salutary effects on final inflation from plunging bond prices would be cancelled if they reverse higher, and soaring stock prices would ultimately send it higher. The glimmer of hope only days ago that falling asset prices could herald falling consumer price inflation was contingent on it at least not being reversed, which contingency is now imperiled if the Fed neutralizes it with a “dovish pivot”.
Let’s put this big bullish bond bounce in perspective. It’s that little jog up on the far right of this chart.
It’s worth noting that this chart underplays the devastating price declines the bond market has sustained, because it’s a total return chart, with historic prices adjusted downward whenever dividends are paid. As we discussed in a recent post, the increasingly significant yields on GOVT are beginning to mute the price effects on returns. This in addition to the fact that GOVT isn’t typically a volatile fund, but a meat and potatoes bond fund heavily weighted in mild shorter term maturities. If it looks this bearish even with all that help, you know it’s bearish.
What does this mean going forward? If this stock rally proves fleeting, the outlook for stock prices isn’t bullish by tautology. If it continues higher, it feeds into the consumer price inflation pipeline, where it will ultimately mean the Fed has more, not less, work to do. And that’s no bull either.
So the choice is you can accept your bear market now or you can have it later. My guess is that Wall Street will try and channel Winston Chuchhill’s possibly apocryphal take on America: You can always count on it to do the right thing … after it’s tried everything else.