Beware the Ides of March
Let me be the first to say: “Beware the Ides of March”
Another hot inflation reading this morning from PPI after a “too hot to cut” CPI inflation reading earlier in the week will filter into another stronger than needed PCE reading for the month of February when it comes out later this month.
Continuing claims also fell lower this morning which should give comfort that although the labor market is slowing, it is not slowing rapidly enough to warrant any policy accommodation at this time from the Fed while it is still trying to slay sticky inflation.
Pushing out the timeline and magnitude of policy easing should be kryptonite for risk markets which have run hard on the idea that the economy had avoided recession and the Fed was gonna give more stimulus.
Friday is March 15th, the Ides of March. It’s also quarterly expiry. Over $3trn of notional value of positions comes off the board tomorrow and that doesn’t include the fact that every stock will have 0DTE trading tomorrow. The volumes are going to be massive.
Come next week, I would expect volalilty to become more unpinned as markets come to grips with a reality that the Fed is going to have to be more hawkish than they were in the December DOT plot given both better than expected growth and too sticky inflation to start the year. While the labor market is starting to slow, it’s simply not slowing fast enough for the Fed to begin thinking about starting its rate cutting cycle.
While markets see a dovish Fed because its an election year, I believe that Powell will not support a rate cut without unanimous consent. Any dissenting votes will open up the Fed to election politics by Trump, something they will want to avoid.
Right now, the Killer B’s (Bowman, Barkin and Bostic) are all againat cutting while Waller gave the “What’s the Rush?” speech. It will take alot to move these four voters. More likely we will start to see the dot plot shift higher as the Fed needs to introduce rates volatility and open up the idea that next move could be a hike again. I think we are going to see cuts for 2024 move from 3 to 2 as it only takes 2 dots to change the median I also believe we are going to see upward momentum on the 2025 dots as well as the potential for the neutral rate to move higher.
I have been saying this for several months now. The Fed didn’t finish the job. They got spooked in late October (along with Treasury) about the rise in yields and term premiums and thus orchestrated a significant loosening of financial conditions to help the US govt finance its continuously exploding deficits. By doing so, the economy didn’t slow enough to bring inflation back down to 2% but instead bottomed and started to re-accelerate again, thus making the last mile unattainable.
Now the Fed is in a box because the labor market is continuing to slow but not rapidly enough to dent wages and core services inflation. Stagflation is the state of play
Even though the Fed has expressed its desire to ease this year, the way to bring inflation back to target is to raise the odds that the next move can actually be a hike or a cut. By introducing volatility back to the rates market, financial conditions can begin to tighten again, term premiums can rise, asset markets will get hit, bringing down inflation expectations and thus inflation before the end of the year.
This is the way. If they continue to want cuts to address this stagflationary environment, the only logical explanation would be that they are doing it to lower US govt borrowing costs which is not supposed to be part of their dual mandate, although definitely is part of their silent mandate to ensure Treasury market properly functioning.
The Fed needs to introduce this rates volatility to stop the animal spirit driven inflation expectation train which has already left the station. Let’s hope the Fed gets the message and acts now otherwise they run the risk of having to deal with a larger problem later this year and closer to the end election.
