Searching in the darkness
Running from the day
Hiding from tomorrow
Nothing left to say
Gathering up our courage
Ready for the fight
Howling in the shadows
'Til we start to bite
-- "Creatures of the Night" Stanley, Mitchell (Kiss) 1982
Can You Hear It?
Can you see it? I know you don't dig it. Seeking answers? Hiding? The howling?
The evidence is plain as day. It's as if that doesn't matter. Not at all.
Markets reacted poorly to what the Fed did on Wednesday afternoon. So unsure. Something... so very not right. The FOMC made their policy decision. The target range for the Fed Funds (overnight) Rate was increased by 50 basis points, now spanning from 4.25% to 4.5%. That move was telegraphed ahead of time, and fully expected. The FOMC "official statement" was a pure "cut and paste" job.
Some kind of mistake? Someone just got lazy? Can't be, but there it is. Third paragraph, third sentence: "The Committee anticipates that ongoing increases in the target range will be appropriate..."
Somehow, despite a (financial community) consensus view that inflation is well past-peak, that ex-shelter, CPI is already in a state of deflation, and that the U.S. economy faces either an imminent economic recession or something very close to it, the FOMC left that word "ongoing" in the statement.
We'd give them the benefit of the doubt. Had not the "Summary of Economic Projections" presented as they did. Had not Chair Jerome Powell actually defended that position at the press conference.
Madness
Somehow, the FOMC, in aggregate, produced a median GDP growth expectation of 0.5% for 2023 on top of 0.5% growth for 2022. FYI: The median GDP expectation through 2025 and into the "longer run" never sees GDP growth recovering to 2%. Given how inaccurate these projections have been, this is (my opinion) a basic admission that recession could be anywhere from imminent to a year away.
It gets worse.
The FOMC sees the unemployment rate rising to a median forecast of 4.6% in 2023 from 3.7% in 2022. That's 1.5M jobs for those keeping score... or hoping that it is not them in the Fed's crosshairs. Are we just using the BLS Establishment survey here? Because several other metrics, most notably the BLS Household survey, show the U.S. economy already well along the road of job destruction. The monthly ADP Employment report is also not nearly as strong over the past several months as has been the Establishment survey. So, let's just close our eyes and go with the strongest survey we can find for job creation. No one will ever doubt our wisdom. We are the Fed. Cool?
The FOMC sees headline inflation dropping to 3.1% in 2023 and well below that beyond 2023. However, this same FOMC shows a median forecast for the Fed Funds Rate of 5.1% for year's end 2023. Seven of these Fed members (out of 19) see the FFR above 5.25% for 2023. How nice. Through if not a recession, a period of little to no growth, while 1.5M individuals lose their jobs. With disinflation already clearly underway. Nice job, gang. You kids at the FOMC have degrees in economics? No? Maybe? Hmm... So much for post-secondary education.
Get this: Back to the dot plot (which should have been terminated years ago) there is one person at the FOMC who sees the Fed Funds Rate at 5.6% in 2024 and even 2025. That's with median inflation expectations at 2.1% at that time and a GDP that still can't reach growth of 2%.
Knock. Knock. Anyone home? Did these individuals put any work into this? Or did they have interns fill out the paperwork so they could do something else?
Am I Done?
I wish. It was then that our esteemed Fed Chair took the podium. Jerome Powell spouted some gems. "We still have some ways to go" and "It is our judgement today that we are not yet at a sufficiently restrictive
On increasing the Fed's 2% inflation target, Powell said, "We're not going to consider that under any circumstances," but also added "it may be a longer-run project at some point." What the heck does that mean? Does Powell even know?
Bottom Line
Markets reversed four times between the 2 p.m. ET statement release and the closing bell as keyword-reading algorithms kept acting on what was written and said and traders kept calling "baloney" on the Fed and central bank credibility. Currency and Treasury markets both appear to be calling out the Fed's gross misinterpretation of forward-looking economic conditions as well.
The reality is that the FOMC does not meet on policy again until February 1. We know that the voting composition of the FOMC will be more dovish next year as James Bullard, Loretta Mester and Esther George are out. There is also a fair chance that the economy will be starting to show more serious cracks in the pavement by then. Fourth-quarter earnings season (which will not be good, BTW) will be about three weeks deep by then as well.
In short, the entire environment will evolve into something else the next time we do this whole dog and pony show. Global equities and U.S. equity index futures are weaker overnight. That's not on the Fed alone.
A bevy of Chinese macro for November was released last night and it was truly awful. For China, November brought less fixed-asset investment, less industrial production and less retail sales than expected, while dishing out more unemployment than projected. On top of that, the European Central Bank and Bank of England are both expected to increase their benchmark interest rates this morning after I submit this piece, but probably before you read it.
As far as Fed Funds Futures are concerned, a 73% probability for a 25 basis point rate hike is being priced in for February 1, with an 82% likelihood for either no increase or another 25 basis point hike on March 22. Futures markets are still pricing a terminal rate of 4.75% to 5%, and a first rate cut in November as well as a second rate cut next December. This despite Powell saying, "I wouldn't see us considering rate cuts until the committee is confident that inflation is moving down to 2% in a sustained way. Restoring price stability will likely require maintaining a restrictive policy stance for some time."
Do not be surprised (more opinion) if disinflation and even deflation become more visibly apparent far more quickly than anyone anticipates. Then, because we haven't really felt much yet, everything the FOMC has done this year really starts to hurt. You can't stop that in real-time, by pausing or trying to reverse policy mistakes. Correcting course will be as slow and as painful as was the making of these errors in the first place.
Quantitative tightening is probably enough for now. That has probably been the case for a little while. Am I alone here? Can no one else see what I see? Or do you all work for someone else with an agenda all their own so you can not speak up?
The FOMC could have and should have used a scalpel in the execution of recent policy adjustments. The FOMC chose to use a sledgehammer. Now, we all will get to pay their price. Congratulations.
Trading Note
Composite NYSE-listed trading volume decreased 12% on Wednesday over Tuesday, while composite Nasdaq-listed trading volume dropped 10.4% from the day prior. This, despite four reversals in direction. Those usually act as volume multipliers. Clearly traders and investors have no idea what to make of these developments. How does one trade an inappropriately positioned central bank?
I had told readers and viewers that I was probably going to higher cash levels in between the end of the traditional Santa Claus rally period and the start of Q4 earnings season. I really do not know yet how I will adjust this. I do know that at least for now, I will have to be more cautious than I had planned.
Coca-Cola
Readers will see in the chart above that Coca-Cola ( KO) has completed a cup pattern with a $64 pivot (left side of cup). This is a staple among staples. Should the market react negatively to what we see before us, this name (I think) will be among the winners.
Pressure on the last sale will build a handle for this cup, while moving the pivot to the right side of the cup (still $64). Competitor PepsiCo ( PEP) has already done this.
This also permits relative strength and the daily Moving Average Convergence Divergence (MACD) to move back to levels that can better provide for upside movement.
In short, I am long KO. The stock yields 2.75%. I expect to add to this position down to its 200-day simple moving average (SMA). I have a $75 target price.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 230K, Last 230K.
08:30 - Continuing Claims (Weekly): Last 1.671M.
08:30 - Retail Sales (Nov): Expecting -0.1% m/m, Last 1.3% m/m.
08:30 - Core Retail Sales (Nov): Expecting 0.2% m/m, Last 1.3% m/m.
08:30 - Empire State Manufacturing Index (Nov): Expecting -0.5, Last 4.5.
08:30 - Philadelphia Fed Manufacturing Index (Nov): Expecting -10.8, Last -19.4.
09:15 - Industrial Production (Nov): Expecting 0.1% m/m, Last -0.1% m/m.
09:15 - Capacity Utilization (Nov): Expecting 79.8%, Last 79.9%.
10:30 - Natural Gas Inventories (Weekly): Last -21B cf.
16:00 - Net Long-Term TIC Flows (Oct): Last $118B.
The Fed (All Times Eastern)
No public appearances scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: ( JBL) (2.24)
After the Close: ( ADBE) (3.50)
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December 15, 2022 at 07:09PM
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Fed Madness, Powell's Ongoing' Mistake?, Confused Traders, Trading Coca-Cola - RealMoney
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