Much Ado About a Pivot (Macro update 15.8.22)
Last week’s US CPI data decelerated at the headline level, providing some respite for stock markets. However, there are at least two points worth noting in terms of the sunnier narrative:
- Price pressures are still rising and the optics of the chart below suggest that more progress will be needed to justify the market’s ‘Fed pivot’ narrative.
At the same time, the following chart suggests that easing underlying price pressures was flattering (blue line) since it was less pronounced once goods impacted by the pandemic are excluded (green line).
2) Easing financial conditions have been driven by equities and the US dollar, but fixed-income markets appear less convinced by the notion of a Fed pivot.
On point 2), rate markets are now pricing in less easing in Q1 2023 (first chart below) but also more easing during the rest of 2023 (second chart below). That is, markets do not believe the economy will be able to withstand Fed tightening — ‘something will break’ — and it will have to reverse course later in 2023. July retail sales released on Wednesday should provide something for the market to chew on this week, in this regard.
We expect risk assets, including digital assets to continue range trading in the current environment. Although illiquid summer markets and still low positioning could lead to a FOMO-style rally, we still believe this is not sustainable given the weak macro backdrop.
Chief Economist and Project Specialist
Disclaimer: The content above does not constitute investment or financial advice. All statements are opinion and not statements of fact.