Inflation Moderation Lags Economic Slowing—Increases Uncertainties for Fed Decisions—M2 Money Stock Growth Rate Declining Rapidly—If Sustained–Economy May Slow Sooner Than Forecasts—Fed Pivoting Sooner?—Treasury Market Depth Below Historic Norms–Third Year of a Presidential Term—a Very Good Year for Stock Market Performance–Presidential Campaign Begins November 9th—Could Bring Pressure on Chair Powell to Pivot

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Fed Recognizes Risks to the Economy from its Rapid Rate Increases—Result-Lower Rate Increases at a Measured Pace As broadly noted, monetary policy impacts demand and inflation with long and variable lags. As important, if not more so, monetary changes take much longer to impact prices than to effect economic output. If this delay proves prescient, then the Fed will face …

Broad Lowering of Earnings Estimates Likely During Quarterly Reporting Period — Monetary Policy Changes Impact Economic Output Before Prices — Increases Chances for Fed Errors – Post-Covid Era Regionalization Benefits North America – End of Zero Rate Environment – Cash as an Asset — Recognizing Risks, Long-Term Equity Values Likely Created

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Chair Powell Continued to Caution Against Prematurely Loosening Policy — Investors Finally Listened Investors, prior to the recent August CPI report, continued to invest, in our view, “hoping” that inflation peaked and would likely decline at a rapid rate. With that “hope,” financial markets seemed to expect the Fed would then begin cutting rates early next year. Instead, if investors …

Chair Powell — Read My Lips — “Restrictive Policy for Some Time” — Treasury Actions May Reduce Near-Term QT Concerns — Service Sector Inflation May Prove Sticky Due to Wage Cost Pressures — Shelter Inflation Increases into First Half of 2023 — QT May Reduce Multiple Inflation – Corporate Fundamentals Regain Focus as a Result

Gregory Nardiello

Chair Powell—Sensitive to Fed’s Errors in the 70’s – Avoid Prematurely Loosening Fed Policies Our past Commentaries referred to the Fed’s failed stop-and-go interest rate policies during the inflationary seventies (See Figure 1). That past troubled experience showed how hard it proved to be to finally pull down sticky inflation. That prior track record could lead to similar errors if …

Goods Inflation Likely Moderating — Inflation Focus Shifts to Services and Wage Costs — Economy Slowing-Mild or Deep? — Fed Must Avoid 70’s Stop-and-Go Rate Policy Errors — Equity Market Hopes – Is That a Strategy?

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GDP Second Quarter Decline — First Real Signs of Economic Slowing — -First Quarter Quirky Decline Masked Internal Growth The government’s “advance” estimate for second-quarter GDP showed a 0.9% decline. In comparison, GDP for the first quarter of 2022 declined 1.6 percent. This would suggest first quarter GDP showed weaker results than in this most recent quarter. However, because of …

Russo-Sino Alliance-Post-Post-Cold War — Erodes Globalization-Russian Control of Gas Supplies May Force Germany to Ration — German Economy Suffers Next Winter

Gregory Nardiello

Russo/Sino Alliance — Post-Post-Cold War — Erodes Globalization — Russia’s Control of Gas Supplies to Europe — Germany May Ration — German Industrial Production Suffers—Increase Depth of European Recession—European Central Bank Will Face a Dilemma The global economy faces inflationary pressures from the Euro-Asian alliance formed by China and Russia. During the first Cold War, both Russia — behind the …

Sharp Market Declines — Negative Wealth Effect — Underwrites Fed Policies – Strong Employment Gives Fed the Umbrella for Aggressive Policies — QT Pressures Multiples — Refocus on Earnings Leads to Stock Selectivity – Less Focus on Broad Indices — Negative U.S. and China Workforce Demographics Changes Globalization

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Current High Levels of Inflation — Broadening Impact With its May meeting, the Fed announced more aggressive tactics in its war to diffuse inflation. Figure 1 provides an updated map of that battlefield. That map shows Median CPI which, in the Cleveland Fed’s view, provides a better sense of underlying inflation than does either headline or core CPI. The chart …

Fed Policy — Dancing Between Raindrops — Fed Tightening and Fiscal Policy Drag Tests 2023 Economic Outlook — Wage Pressures a Secondary Inflation Impact Could Lengthen Higher Inflation — Accelerating World Food Inflation Could Affect Emerging Market Debt Obligations — Fixed Income View Change

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Current High Levels of Inflation—effect Broadening According to the Cleveland Fed, the median Consumer Price Index (CPI)  provides a better sense of  underlying inflation then either headline CPI or CPI excluding food and energy. Median CPI, represented in Figure 1 by the orange line, shows half of CPI components experienced annual price gains of 4.9% or greater—the highest rate since …

“Putin Shock” — Financialization of Warfare Threatens “Risk-Free” Status of U.S. Govt. Debt — Can the Fed Thread the Needle Between Soft Landing and Disinflation? – Will Planned Rate Increases Achieve Sufficient Positive Real Rates to Lower Inflation? — Will Eroding Consumers’ Real Incomes Lead to Slower Economic Growth and Shift Away from National Brands? – Will Tight Labor Markets Lead to Higher Productivity? –Displacement and Replacement?

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“Putin Shock” Underlines Eurasian Threat to Western World—U.S. Global Military Power and U.S. Dollar Reserve Status Go Hand-In-Glove We titled our last commentary The “Putin Shock” Could Create Shocking Changes –  unfortunately, that proved too true. The “Putin shock” plus the pandemic changed our world for the foreseeable future. “The world has entered a new period of turbulence and change,” …

“Putin Shock” May Create Shocking Changes – Inflation Becomes Viral? — Quantitative Tightening (QT) Lower Multiples? –Wage Pressures and Tight Labor Markets Lead to Higher Productivity?

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COVID Variants Lower Forecast Confidence — Greater Market Volatility Americans entered 2021 with the hope that the miracle of vaccines would lead to an “end” to COVID as a major concern. A year later, with Omicron spreading rapidly, albeit a milder variant, that hope remains unanswered (see Figure 1). With that, government leaders suggest Americans will need to prudently live …

Fed Rate Liftoff and Balance Sheet Runoff (QT) Difficult to Pull off in Parallel — Produces Heightened Policy Risks — QT Could Reduce Market Liquidity — Earnings Growth Then Key to Equity Performance Rather Than Multiples — Negative Real Rates Remain — Result Limited Economic Restraint — Consensus Expects Inflation to Moderate Around Mid-Year — Risk to That Consensus Potential Extended Wage Pressures

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COVID Variants Lower Forecast Confidence — Greater Market Volatility Americans entered 2021 with the hope that the miracle of vaccines would lead to an “end” to COVID as a major concern. A year later, with Omicron spreading rapidly, albeit a milder variant, that hope remains unanswered (see Figure 1). With that, government leaders suggest Americans will need to prudently live …