Morning Jog

Friends in High Places

For much of the past few weeks, writing a financial headline has been a simple copy + paste job:

Markets rally on hopes of a Fed rate cut after a disappointing < fill in the blank >economic report.

In the near-term, such “bad news is good news” reaction is not perverse, nor is it particularly unusual. “The Fed is our friend” and so on. Economic growth is slowing, more acutely in trade and manufacturing activity.


(Source: Bloomberg)


Inflation is not around. And there are signs that the uncertainty created by the new protectionist paradigm is starting to seep into business sentiment.  CEOs are a bit more gloomy about future sales numbers and expect hiring and capital spending to slow.

Now we have the Morgan Stanley Business Conditions Index posting its largest monthly decline EVER and reaching the lowest level since December 2008.  The 2008 comparison is, I suspect, why this index is trotted out in the news…but, it ain’t pretty for sure:


(Source: CNBC)


This atmosphere of apprehension about economic trajectory is causing the markets to discount no possible Fed action, but a rate cut (90% probability of at least two cuts by year-end, to be precise). The “don’t fight the Fed” positioning is evident in the bond market and in the rebound in stocks so far in June.  And while Jerome Powell can’t obviously state “we’ll do whatever it takes to keep the markets happy”, his June 4th statement that the Fed will “act as appropriate to sustain the expansion” was certainly interpreted as such.

But there is historical precedent that market expectations for Fed policy are often off the mark. The wisdom of crowds falls short when anticipating Fed moves. Traders expected a rate increase from 2001 – 2004, a flattening from 2004 – 2007 and an increase from 2009 – 2016.  Missed it every time. So Deutsche’s Chief Economist asks – what makes today any different?


(Source: Deutsch Bank)


The Mexican tariff issue came and went within two weeks, without much agitation. Fatigue is setting in.



Enjoy your weekend.
Alex