Some Foot Pressure on the Economic Brake
Macro Perspectives
Stocks closed down, after a streak of nine consecutive days of higher closes. Yields finished sharply higher, after printing a seven day low.
What's going on?
After a barrage of Fed speakers over the past two days, Jerome Powell (the most important voice) made some prepared remarks at an IMF panel discussion. Would he walk back on some of his commentary from last week's post-FOMC press conference?
He said, "if it becomes appropriate to tighten further, we will not hesitate." - Nothing new there.
Keep in mind, we shouldn't expect to get an "all clear" signal from the Fed on inflation. Some ambiguity, with a threat that they could do more, is exactly what we should expect . . . and that's what they are giving us. The verbal sentiment manipulation keeps some foot pressure on the economic brake, which adds downward pressure on inflation (some insurance).  Â
With that, and with the chart below in mind (from my Wednesday note), we should expect them to be reactive on the way down (i.e. behind the curve on rate cuts).
So, it seems clear that they will be too tight as inflation continues to fall next year. The question is, will the Fed's stance induce recession, or just reduce growth (from hot to moderate).
Now, while Powell didn't say anything new, it was the Treasury auction that was the driver of the decline in stocks/rise in yields.
Demand was weak for 30-year debt issued, with bonds sold at a higher yield than indicated going in. That created some deserved scrutiny about the oversupply of U.S. debt, which the Treasury is issuing to pay interest and finance the bloated deficit. It was later reported that a cyber-attack (ransomware) at a Chinese bank impacted the Treasury demand.
As I said throughout the years, here in my Macro Perspectives notes: "in its short history, Bitcoin has a record of being a tool of corruption and money laundering." On that note, a 2022 study by Chainalysis found that the price of Bitcoin tends to rise in the weeks leading up to some sort of malfeasance. Perhaps the move of the past four weeks was a signal of this ransomware attack.
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