Weekly Market Review N°11
05/06/2022
by Alessandro Gherzi
Lest we forget the last time Fed Chair met POTUS in the spring of 2021, as it marked the beginning of the downturn in equities that is plaguing us till this day. The slide in equities and the annihilation of risk assets since that rendezvous is not coincidental and in our view was a direct result of the influence the White House has on the Federal Reserve and it’s Chair. Let’s for a minute reverse the clock back to a few months ago and remind ourselves what did Joe Biden ask Jerome Powell to find under the Christmas tree and what he offered in returned. In short, inflation was starting to become a serious issue for the Democrats and plunging approval ratings primarily due to an uptick in the cost of living were making life uneasy for Joe and his crew. On the flip side, the Fed Chair’s seat was about to become vacant as Jerome’s term was up but he was nonetheless in the mix for reelection. It was a case of wink wink, you start tackling what is giving me a headache (inflation) and in return you keep your job (Fed Chairmanship). So much for the Fed being an independent, superpartes entity, but that’s a story for another day. So after a quiet Memorial Day Monday, with market participants given an extra day to sober up from last week’s exuberant market rally, many were wondering how would Tuesday’s no doubt impartial chit chat between Joe and Jerome pan out. Not to miss on a fun gathering of old friends former Fed Chair Janet Yellen and current Treasury Secretary also joined the party. Once formalities cleared and with niceties out of the way, and as if Jerome hasn’t done enough already in toughening his monetary policy stance, he was reminded once again in front of whom he’s got to kneel and who’s hand he’s got to kiss. The whole press conference was awkward to say the least but the message from both Biden and Yellen was loud and clear “Jerome we are the hand that feeds you, so do as you are told”. Joe during a brief speech managed to sound like a broken record with the word “inflation” littering the airwaves, whereas his old friend Janet did a mea culpa admitting twelve months too late that the administration got it all wrong in terming inflation as transitory. Our take is that Jerome, the man that drives markets, has reaffirmed his allegiance to the man that kept him in the job and will hence do as he is told. Although markets shrugged it off and overall were little changed on the day, this is not great news for the doves that are hoping for the Fed to change course in the near future. We are not saying that they won’t, but until the fire spurting inflation dragon is slayed by valiant Jerome then chances of a change of heart remain slim, and we would hence be on the side of caution in calling a bull market reversal.
Our take is that Jerome, the man that drives markets, has reaffirmed his allegiance to the man that kept him in the job and will hence do as he is told.
Speaking of trend reversals, we might start seeing glimmers of hope when big wigs often playing their own book start forecasting doom and gloom. As like Yellen apologizing for the “transitory inflation” blunder twelve months late, JPMorgan Chase’s CEO Jamie Dimon said with a six months delay that he is preparing the biggest U.S. bank for very rough times ahead. “You know, I said there’s storm clouds but I’m going to change it … it’s a hurricane,” Dimon said Wednesday at a financial conference in New York. While conditions seem “fine” at the moment, nobody knows if the hurricane is “a minor one or Superstorm Sandy,” he added. Fine? Really? I guess Jamie’s Bloomberg terminal has been down for a good few months, or perhaps he is in a state of see no evil hear no evil. He gives advice aplenty though “JPMorgan is bracing ourselves. You’d better brace yourself”, thanks Jamie perhaps he is inviting us all to tighten our belts as he has done following JPMorgan’s shareholders objection to his $50 million retention bonus that they voted against a couple of weeks ago. Possibly what he said was in anger, however when the most powerful banker in the US says “Right now, it’s kind of sunny, things are doing fine, everyone thinks the Fed can handle this” you start questioning the integrity of such comments. It hasn’t been “sunny” for a long while and if he has been reading our weekly its for months now that we have been writing that “no the Fed can’t handle this”. You might say, so who cares what a fat cat has to say, but this scaremongering does ultimately weight on investor’s psyche, so much so that his comments reversed a positive trading day on Wednesday to end up firmly in the red.
until the fire spurting inflation dragon is slayed by valiant Jerome then chances of a change of heart remain slim, and we would hence be on the side of caution in calling a bull market reversal.
One thing that the Fed will start this month and that Dimon did overemphasized in his speech, is the start of the so called quantitative tightening, namely a reversal of its emergency bond-buying programs, that were primarily implemented to prop up markets during the pandemic sell-off, and that have now run their course and will result in a shrinking balance sheet. Quantitative tightening will no doubt have a significant impact on markets and can’t certainly be dismissed, however we have to yet again caution against bold statements that sent markets lower on Wednesday. Dimon warned “That hurricane is right out there, down the road, coming our way.” primarily due to the fact that “We’ve never had QT like this, so you’re looking at something you could be writing history books on for 50 years”. Sure QT will not help, it is unquestionable, however there is little doubt that behind closed doors two of the most powerful bankers in the world do discuss how to conduct QT, especially considering that most of it will filter through institutions just like JPMorgan. As it is a new phenomenon, our take is that the Fed will be very careful in how it will deploy QT and they are in uncharted water in terms of playing around with it. We expect that they will handle it with care and that no, history books will not be written on it, and Jamie knows it. What we would say is that usually when people of the calibre of Dimon are months late in spreading doom and gloom and markets reach peak fear, and we don’t think we’re quite there yet, then we start seeing telltale signs of a trend reversal.
Quantitative tightening will no doubt have a significant impact on markets and can’t certainly be dismissed, however we have to yet again caution against bold statements that sent markets lower on Wednesday.
If fearmongering of tougher things to come was not enough to rattle markets mid week, concerns over tighter monetary policy gained even more steam Wednesday, after the Institute for Supply Management said its manufacturing PMI came in at 56.1 for May, up from 55.4 the previous month. Macroeconomic data is hence painting a picture of a US that is still humming along and that the economy is resilient in spite of 40 year high inflation and a tiring consumer. Paradoxically and counter intuitively, for markets this is exactly the issue, as buoyant economic data is perceived, quite rightly so, to give further firepower to the Fed to tighten monetary conditions without risking to stall or worse plunge the economy into a recession. The Fed is dipping it’s toes in ice could water but it’s not getting frost bitten, for now. They are feeling progressively emboldened, as the recent interest rate hikes are not causing a sharp economic slowdown however are not yet aggressive enough to tamp down inflation, hence giving them carte blanche to deploy all their might in the fight against inflation. This bizzarre paradigm of “bad news are great news” or “good news are bad news”, depending on one’s point of view, were further laid bare on Friday. On the day investors parsed through the latest jobs report issued by the Bureau of Labor Statistics that showed U.S. hiring remaining elevated in May with nonfarm payrolls adding 390,000 jobs last month versus market expectations of 328,000 jobs added. That was a significant beat on expectations and unquestionably great news for the economy, lo and behold markets sold off sharply, remember in today’s day and age “good news are bad news”. The Fed is the swing factor in investor emotions and employment numbers this strong are unlikely to make the Fed less hawkish and perhaps not as eager to lean towards the second commandment of their mandate that is full employment. The only saving grace in Friday’s payroll numbers was that average hourly earnings rose 0.3% in May, slightly less than the consensus estimate of 0.4% and in line with April’s pace. Should have earnings growth surprised to the upside instead of missing to the downside equities would have capitulated, as at the very least we are averting a wage price spiral, which is one of the most dangerous and sticky forms of inflation…markets have breadcrumbs to be grateful for.
As it is a new phenomenon, our take is that the Fed will be very careful in how it will deploy QT and they are in uncharted water in terms of playing around with it.
Markets have unsurprisingly had a bad week and could not continue last week’s strong rally that proved, as many feared, a dead cat bounce. A quick word on crypto just to justify the title of this newsletter, as it was a particularly quiet week in the space. Little to write home about aside from the fact that there are protocols and protocols. We have been warning for months that the “move fast and break things” approach of so many protocols over the very few that favored rigor over implementation could backfire. Solana had yet another outage this week and SOL did end up being the worst performing token in the top 100 cryptocurrencies ranked by market cap. What this week leaves us with is that we are yet to turn a corner, and that a bullish trend reversal is still eluding us. The transition from a ‘buy the dip’ to a ‘sell the rally’ mentality is ever so pervasive and in our view a reversal will happen only with a downtrend in inflation. Next week’s all important inflation reading will be telling.
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We have been warning for months that the “move fast and break things” approach of so many protocols over the very few that favored rigor over implementation could backfire.
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Alessandro Gherzi | CFO STIMA
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