The Fed affects demand…for stocks
May 19, 2022
–Ouch! Am I bleeding? DJIA -3.6%, SPX -4.0% and Nasdaq Comp -4.7%. Big retail stocks were hammered. Since last month’s highs WMT -23%, TGT -36% and COST -29%. Oh, is that what Powell means when he keeps saying the Fed can affect the demand side? All of a sudden the tenuous relationship between stocks and the destruction of consumer demand appears to have some sort of nebulous link. No one could have seen that coming, right? As of this writing ESM is 3862.75, down 60. SPX is nearing a decline of 20% from its high. Recall that in 2018 that’s when Powell folded (at a 20% decline in SPX) and Mnuchin deemed it necessary to convene a group of bankers to assure continued liquidity. Fed officials have guided market participants to a “base case” of two more consecutive 50 bp hikes. At yesterday’s close, August Fed Funds were 9811.5 or 1.885%, pricing a dollop more than 100 bps over the current Fed Effective of 0.83. Paraphrasing Mike Tyson, “Everybody has a plan [base case] until they get punched in the mouth.” We’re starting to see a bit of capitulation…Gabe Plotkin is shuttering Melvin Cap … it used to be “Capital” but he lost the last four letters. Next thing you know, Bullard’s going to be out front advocating a pause in policy. There was a buyer yesterday of 20k EDM2 9825/9831.25 c spread for 0.75 ref EDM2 9818.5. Could one of those 50 bp hikes be trimmed back to just 25 or iced altogether? It’s four weeks until the June FOMC.
–Fixed income is starting to question the Fed’s resolve. Not so much in the front end, which seems to accept the base case, but a bit further out. Twos fell 3.7 bps yesterday to 2.665% while tens lopped 9 bps off the yield to 2.882%. I can’t help think that a Doomberg piece yesterday was also instrumental in focusing people on “custodial credit risk” with an article on Coinbase and the possibility that clients with funds on deposit at that august institution might be deemed general creditors in the event of bankruptcy. We’re back to the idea of “bail-ins”, and I don’t like the sound of it. All of a sudden the idea of gold coins in mason jars buried in the backyard (of a friend of mine, of course) doesn’t seem so stupid. Neither does parking money in short term treasuries.
–Philly Fed expected 15 from 17.6. Existing Home Sales.
**************************************************************
“People were asking me [before a fight], ‘What’s going to happen?,’ ” Tyson said. “They were talking about his style. ‘He’s going to give you a lot of lateral movement. He’s going to move, he’s going to dance. He’s going to do this, do that.’ I said, “Everybody has a plan until they get hit. Then, like a rat, they stop in fear and freeze.’ “
https://www.youtube.com/watch?v=hOHvMqAgcmc
