Transports Confirm Utilities Strength Is NOT About AI
Challenge The Narratives
Investors will settle in for a three-day weekend with a lot to consider. NVIDIA’s earnings report and stock split announcement captured the attention of the tech bulls, but there are other larger macro forces to keep an eye on. In particular, inflation and liquidity.
In the FOMC minutes released this past week, Fed members indicated their frustration that inflation wasn’t making progress towards its 2% target, even going as far to say that further rate hikes should be written off altogether. I think it’s very unlikely that Powell even considers this (barring some type of tail risk event), but it will exert a persistent headwind that’s likely to show up in the data eventually, if it isn’t starting to already.
But it’s important to put that context up against the fact that the Fed will also be dialing back QT to the tune of $35 billion a month starting in June. So we’re in the middle of a “higher for longer” regime where the Fed has actually talked about hiking rates further, but they’re also going to be adding more liquidity to the system? Do I have that right? The Fed is saying all the right things publicly about wanting to bring inflation under control, but I think this demonstrates pretty clearly that they want to ease here. So far, they’ve managed to pull off the soft landing and I think they want to do everything in their power to keep that narrative alive. I believe Powell and the Fed want to be remembered as the ones who rescued the economy from recession and potentially even worse damage from post-COVID conditions. As far as inflation risk is concerned, the Fed can keep rates elevated, but if they’re going to pivot from QT to QE as it relates to balance sheet runoff, you can bet that inflation is going to be around for a while.
Keep reading with a 7-day free trial
Subscribe to The Lead-Lag Report to keep reading this post and get 7 days of free access to the full post archives.