Pro Perspectives 9/21/23





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September 21, 2023

With some time to digest the message from the Fed yesterday, the 10-year yield surged and finished on the highs today.  We are now revisiting a 4.5% 10-year yield, for the first time since November of 2007.
With that, stocks finished on the lows of the day.  
And we have some charts that look concerning…  
As you can see in this chart above, this trendline from the March lows has been broken.  And this trend, importantly, was driven by a Fed response to the confidence shock in the banking system.  They stepped in to provide liquidity to depository institutions to backstop deposits.  And the bottom was in.
So, this line has been broken.  And we have similar charts across the stock indices (the Dow, Nasdaq) — all trend breaks.
With this break, the money management community piled into hedges.  The VIX spiked, albeit from very subdued levels.
Even oil, which has been on a tear the past three months, traded down as much as 4% from yesterday's highs.
This, all because the Fed projected two less rate cuts for next year?
Remember, many economists and much of Wall Street have been expecting recession for the better part of the past year.  Why?  The dreaded "inverted yield curve," which has historically been a predictor of recession.
That said, we had a technical recession, already — in anticipation of the tightening cycle. It was the first half of 2022.
Is the Fed hell-bent on inducing another one?  That seems to be the belief, based on the initial response from markets.
But remember, as Jerome Powell ended the press conference yesterday, he had this to say about the economy:
I think overall households are in good shape. Surveys are a different thing. So surveys are showing dissatisfaction, and I think a lot of that is just people hate inflation, hate it. And that causes people to say the economy is terrible, but at the same time they're spending money. Their behavior is not exactly what you would expect from the surveys. That's kind of a guess at what the answer might be. But I think there's a lot of good things happening on household balance sheets, and certainly in the labor market and with wages. The biggest wage increases having gone to relatively low-wage jobs, and now inflation coming down, you're seeing real wages, which is a good thing.
With this assessment, and an economy that is running at a near 5% annual growth rate, the Fed still seems more concerned with throttling a strong economy, rather than tipping a weak economy into recession.
My view:  At this point, they don't want to give the "all clear" signal to markets, which would provide fuel to markets and the economy.