2H-22 Asset Price Lift Off…
Macro Perspectives
The Fed delivered on expectations with another 75 basis point hike.
We've discussed the case for this possibly being the end of this tightening cycle.
Jay Powell opened the door to that scenario in the press conference. He called the (now) Fed Funds rate of 2.25%-2.50% neutral (i.e. not accommodative nor restrictive of economic activity), and he said they would no longer "guide" on policy, but take things meeting by meeting, dependent on the data.
Remember, if we look back at the last tightening cycle, this level on the Fed Funds rate is right around where the Fed was forced to stop and reverse on their tightening campaign. Without repeating the entire case, the bottom line is, the domestic economy can't handle higher rates, nor can the global economy (mostly due to highly rate sensitive/unsustainable global credit markets).
Also, as we discussed yesterday, simultaneously (and contradictorily), Congress is pouring more fuel on the fire.
No sooner did the Senate finish a vote, approving another $280 billion in government spending (of which $228 billion looks like climate and energy transformation, masked as a "China competitiveness" bill), than was the controlling party of Congress already announcing a reconciliation process to ram home the remainder needed to fund the "Build Back Better" agenda - with yet another $669 billion spend.
Remember, "Build Back Better" is the cornerstone of the global (G7) agenda, of which, the U.S. administration is in full, explicit cooperation to execute. It's rooted in energy and social transformational policies, and it doesn't get done in the most important constituent country (the U.S.), if the democrats lose control of Congress in November. I alluded to it earlier this month, what will they do to ensure it gets done? "Whatever it takes." It looks like it will get done.
With all of the above in mind ...
I posed this question (and answer) last week: "What will stocks do when the realisation finally sets in that the Fed (and major global central banks) can't and won't do anything meaningful with interest rates? Answer: Stocks will soar."
Add to this, my closing statement from yesterday's note: More fiscal spending, with monetary policy tools exhausting, is a formula for higher asset prices.
I suspect in 2H-22 we will come to realise the above…and dare I say it, we may even end the year in positive territory…
