Rangebound

Macro Perspectives: Wed 16 Sept 2020

The markets seem to have gone range bound, for now, and without a fresh catalyst, things may very well stay this way into the debates (the first one, scheduled for Thu 29 September).

We talked yesterday about the prospects of the U.S. being pulled into a China/India war - that would be a catalyst for market participants - otherwise, some seem to be awaiting fresh stimulus out of Capitol Hill, as a greenlight to get more aggressive.

It will likely be a long wait. The democrats lost their leverage last month, when Trump used executive order to extend the federal unemployment subsidy - the daily posturing on stimulus, at this stage, is just politicking.

Yesterday we had more manufacturing data that continues to support the projections that Q3 will be a huge counterpunch to the 32% (annualized) economic contraction in Q2, with the Atlanta Fed's GDP model now projecting +31% annualized for Q3.

We have a Fed decision this afternoon. We also already know that the Fed has done and will continue to do whatever it takes to preserve stability and to manufacture recovery. Part of that effort has been a campaign to make us believe that they will keep rates at zero forever (at least for a very long time).

Back in July, in a survey of primary dealers (trading counterparties to the New York Fed), they were already expecting the Fed to stay put, at zero, until 2024. Since then, Jay Powell has made it Fed policy that they will let inflation run hot (sustainably over 2%) before they will even think about budging. So the expectation of zero rates has been pushed out even farther.

That's all intended to promote an expectation that inflation is coming, and that is intended to promote spending, not saving.