In today’s briefing:
- Fed Policy Outlook: Looming Pivot and a Higher Inflation Target?
- Sentiment Whipsaws Are Masking the Bear Trend
- The Fed Has Cratered Stock-Bond Diversification, What’s Next?
- The 30,000-Foot View
Fed Policy Outlook: Looming Pivot and a Higher Inflation Target?
- The better-than-expected October US consumer prices release has imparted hope in financial markets of a looming turning point in the conduct of US monetary policy.
- History suggests the yield curve inversion since July indicates the onset of recession in 2023 H2, by which time the Fed should have an ample buffer to reduce interest rates.
- The proponents of a higher Fed inflation target argue that the costs to the real economy of dogmatically pursuing a 2% goal are excessively high due to supply-side forces.
Sentiment Whipsaws Are Masking the Bear Trend
- The recent risk-on episode is attributable to the combination of excessively bearish sentiment and a positive inflation surprise.
- Most of the effects of the buying stampede have likely dissipated.
- Technical conditions are weak and the bear market is poised to resume.
The Fed Has Cratered Stock-Bond Diversification, What’s Next?
- The performance of balanced funds was challenging in 2022. You would have to go back to the Volcker Fed of 1980–1982 to see positive correlation between stock and bond prices.
- The good news is the inflection point should be just around the corner.
- Positive correlation between stock and bond prices in 2022 should translate to a strong return recovery for balanced funds.
The 30,000-Foot View
- In this business, we are often inundated by countless news headlines telling us all about what’s happening…now.
- It’s a never-ending process that invites market participants to spend time and energy dissecting how new information affects the investment landscape.
- For a macro investor though, every now and then taking a step back is crucial: with a 30,000-foot view, the macro big picture becomes increasingly clear.
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