With a nod to one of America’s most famous poets, Ralph Waldo Emerson, today’s title seems quite apropos given this week’s market action. Everyone seems to know the destination: decent global growth, job creation & lowflation but there is next to no consensus on how to get there.
There are at least two clear cut camps at opposite ends of the spectrum. One is the inflationistas, Deutsche Bank & others who fear continued high inflation and believe the Fed needs to tighten even more aggressively than the markets have priced in. The other camp includes our good buddy Chase at Pinecone Macro who sees growth slowing fast and fears a Fed policy mistake by hiking into a slowdown that’s already underway.
Identifying these two camps help one understand the post Fed meet market action Wednesday & yesterday’s abrupt and almost jaw dropping cross asset reversal. As expected, the Fed hiked 50 bps; in the first in person press conf in over 2 years Chair Powell was then asked about prospects for an upcoming 75 bp hike – something the inflation camp thinks is needed. He indicated that such was not currently being considered, setting equity markets off on a 3% + rally as the growth worry camp took the policy mistake risk off the table.
Yesterday markets were milling around until the Q1 labor cost and productivity numbers came out and they were a terrible twosome, labor costs well above expectations, thus spooking the inflation camp and very bad, horrible productivity #s, reinforcing the growth camp concerns around earnings and margins. Thus, a dramatic cross asset selloff ensued reinforcing the unusually wide negativity that is starting to characterize the current enviroment.