Stern Warning From the Fed
What is it?
The Fed met last week and maintained a hawkish stance for 2023. In contrast, a dovish stance would imply the Fed is looking to help the economy grow faster.
“No Federal Reserve officials thought it’d be appropriate to begin cutting rates in 2023, and officials worried easing financial conditions could complicate the central bank’s efforts to bring down inflation.”*
Fed officials mentioned on Wednesday that “it would take substantially more evidence of progress to be confident inflation was coming down in a sustained manner.”*
Why does it matter?
There is still room to move rates higher. While it is not certain where the Fed may decide to have interest rates peak, they are estimated to reach over 5%.*
“Officials suggested price pressures could prove to be more persistent than anticipated, noting the job market has remained strong for longer than anticipated. The Fed raised rates by 50 basis points in mid-December to a range of 4.25% – 4.5%, the highest level since 2007 — its most aggressive stretch since the 1980s.”*
With the interest rates and stock market pointing towards a tough start to 2023, our positioning in the markets maintains a risk-off approach.
Bad Data – Good News
What is it?
The stock markets bolted higher on Friday after the ISM services data point for December came out early in the trading day. The Institute of Supply Management (ISM) Services Index is an economic index based on surveys of more than 400 non-manufacturing (or services) firms’ purchasing and supply executives.
The data came in at 49.6. An ISM Services number of less than 50 is deemed to be recessionary. Additionally, the rate of change of the data point was the worst one since 2008.
Source: www.Hedgeye.com
Why does it matter?
We believe that the markets are hoping that such news will force the Federal Reserve to pivot their hawkish stance on rates. However, the Federal Reserve is not planning on easing monetary policies any time soon as Jerome Powell, the Chairman of the Fed stated many times.
Our opinion is that the data point proves that it will be hard for the Federal Reserve to lower inflation while engineering a soft economic growth landing.
Other articles we found interesting this week:
Credit Suisse seeing strong demand for new sterling-denominated bond
Walgreens posts loss on $6.5 bln opioid litigation charge
Markets quiet down ahead of high-tier data releases
Current 401(k) portfolio
Our last portfolio reallocation: 5/19/2022.
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The weekly market insight provides a window into the process we use in our investment management process. At Breakaway, we believe markets are always changing and require a nimble yet data-oriented approach.
Our process attempts to identify trends and momentum in the financial markets. With that information, we align our clients’ portfolio accordingly in the hope to help our clients accomplish their life goals while attempting to lower the risk of a large drop in their portfolio.
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Sources:
*Jennifer Schonberger. “No rate cuts in 2023, inflation risk remains in focus”. 1/4/2023. Yahoo Finance. https://finance.yahoo.com/news/fed-minutes-rate-cuts-2023-inflation-risk-focus-194814712.html
**Brian Swint. “Oil Rebounds After Biggest New Year Drop in Three Decades”. 1/5/2023. Barrons. https://www.barrons.com/articles/oil-rebounds-crude-opec-51672914766?siteid=yhoof2
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