Pro Perspectives 5/1/23

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May 1, 2023

We have the Fed on Wednesday.

They’ve raised 475 basis points in thirteen months. And the market is pricing in a better than 90% chance that they will go another 25 basis points this week.

This, despite the banking shock of the past six weeks, which has now claimed a third victim.

Remember, after hiking in March, on the heels of two bank failures, Powell actually made a strong case in his post-meeting press conference that they should have paused. He talked a lot about the credit tightening that they thought was “quite real.” In fact, he said directly that the banking stress, and related credit tightening, has an equivalent effect of a rate hike, and will weigh on inflation.

Well, we got the Fed’s favored inflation number this past Friday — the March reading. It held pretty steady at 4.6%. Even if we annualize the average monthly change of the past six months, it’s 4.2%.

If we take that inflation data into account, and give a heavy weighting to market sentiment, we should expect the Fed to go forward with another 25 basis points on Wednesday.

They’ve clearly made an effort to set the expectation. The market has taken the “guidance.” So that becomes the path of least resistance.

But if the discussion in the post-meeting press conference is not about pausing, it will be a negative surprise for markets.

With the above in mind, the level of interest rates has proven to break things in the financial system.

A hike on Wednesday will take the level another step higher.

That said, by now we should know that the major central banks in the world have coordinated to normalize monetary policy — and have agreed, in coordination, to intervene, when necessary, to fix what they break.

And these interventions have a solid record of marking the bottom in stocks (and sentiment).

Remember, we looked at this chart of the S&P back in March 10th, after the big run on Silicon Valley Bank. This chart is a snapshot on that Friday afternoon. By Sunday night, the Fed stepped in, promising to provide liquidity to depository institutions to backstop deposits.

Intervention.

The bottom in stocks was marked the next day.

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