Published September 21st 2022

Daily Brief - No soft landing for the economy

TL;DR

It was August 26, and Chairman Powell was about to take the single biggest stage he has every year: the annual gathering at Jackson Hole. His message left no doubt. The Central Bank has become a single mandate institution. Bringing down inflation back to its 2% target is now all that matters. After a disappointingly slow peak in the CPI, all eyes are on the Fed meeting this Wednesday. What does that mean for the markets?

This time, fixed income markets got the message. 2-year Treasury yields are now at their highest level since the Global Financial crisis. It was not always so.

After another 75 bps increase in July, Mr. Powell vaguely hinted at the Fed eventually moderating rate rises. Investors were elated and markets staged a rally that usually marks the end of a hiking cycle. It was not to be, and the Jackson Hole speech set the record straight. The S&P 500 has slid nearly 7% since then, and the 2-year Treasury yield has hit its highest level since 2007.

2y treasury

The Fed’s determination to bring inflation down - at whatever the cost - has hardened since. The officials are anxious not to let an inflationary mindset take root. That is why they are in a hurry to see the economy cool. Already, wage growth is racing ahead: wages for private-sector workers rose 5.7% for the 12 months through June.

The longer inflation is high, the greater the risk “that the public will start to just naturally incorporate higher inflation into its economic decision-making. And our job is to make sure that doesn’t happen” Powell said in a follow-up speech on September 8.

The Fed seems to be borrowing heavily from the 1980s’ playbook by the legendary chairman Paul Volcker, credited with breaking the inflationary cycle of the 1970s. “Vacillation and procrastination, out of fears of recession or otherwise, would run grave risks,” Volcker told lawmakers in early 1980.

There is another reason to frontload the hikes. Public and market tolerance for tighter monetary policy is far higher with the unemployment rate below 4%, a historic low. When it eventually rises above 5%, the Fed will face more pressure to take into account the tradeoffs between employment and inflation.

The natural lag between the monetary policy and its subsequent impact on the economy gives them some breathing room - and a brief window to hike aggressively.

Idea Spotlight: Ferrari

Volatility indicators for RACE:NYSE dropped to 30.58 and historically, this led to a median increase in price of 10.61% over the following 3M. TOGGLE analyzed 12 similar occasions in the past to produce the median projection and this insight received 7 out of 8 stars in our quality assessment.

Ferrari investors couldn’t have been surprised by news the Italian luxury supercar maker finally unveiled its long-awaited first SUV but the shares nevertheless notched a solid gain after sliding recently.

ferrari price history

Daily Brief - No soft landing for the economy

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