Michael Lebowitz | Aug 30, 2021 07:49AM ET
A quiet start to the morning in the aftermath of hurricanes Ida and Powell. Prices of crude oil and natural gas rose on the open last night with over 90% of Gulf of Mexico production shut-in. Both energy products are set to open flat. Equities and bonds are also looking to open unchanged in the aftermath of Powell’s dovish speech.h3 What To Watch Today/h3
Economy
Earnings
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The bulls rushed back into the market on Friday. Heading into this week, there is little upside likely as the market is within an upward trending channel since last September.
With the market very overbought short-term, volatility compressed, and volume and breadth weak, it is likely we may see additional choppiness in price action again. As noted in this past weekend’s #RealInvestmentReport:
“Heading into the Jackson Hole Summit meeting and not knowing how the market would react, we made some adjustments to our portfolios on Thursday. As we discussed with our RIAPRO subscribers, our goal is to reduce the “volatility” of the portfolio, thereby reducing risk without significantly sacrificing performance. So even though we took profits in stocks like WOOF and replaced FANG with XOM, we held equity allocations essentially flat at 50%.”
h2 Ambiguity/h2“We still hold a slightly higher cash balance in the equity sleeve (~10%) and the fixed income sleeve (~10%). We use the cash as a risk hedge against an equity draw and “shorten duration” in the bond allocation. While we were previously increasing the duration of our bond portfolio to capture the decline in rates, we are holding cash to add longer-duration bonds on upticks in rates.”
Investors were fretting the Jackson Hole symposium would result in a firm timetable for an aggressive tightening campaign beginning as early as September. As seen in Powell’s comments below, what it got was more ambiguity around timing and amounts. After Powell’s speech, Fed Governor Harker was equally vague: “The Fed has reached an agreement that tapering will begin this year.”
h3 The Oracle Speaks/h3Chairman Powell’s much-awaited speech is being met with optimism in the markets. In particular, the following line is assuring investors the Fed will not be aggressive in tapering QE. In regards to premature tightening he says: “Today, with substantial slack remaining in the labor market and the pandemic continuing, such a mistake could be particularly harmful.“
h2 Below are two key segments from his speech:/h2h2 PCE/h2“Congress instructs the Federal Reserve to pursue monetary policies that promote maximum employment and price stability. The Federal Open Market Committee (FOMC) determined that “inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures [PCE], is most consistent over the longer run with the Federal Reserve’s statutory mandate” for price stability.
The Federal Reserve Bank of Dallas trims mean PCE inflation measure to closely to the trend in overall PCE inflation. By omitting price changes for goods and services having the largest or smallest price movements in a given month, extreme values have less impact on the measured inflation rate, which arguably is a better measure of underlying inflation trends than the traditional core measure.
PCE, met expectations rising 0.4% in July. The level was 0.1% below the June reading. The year-over-year rate is 4.2%, which is more than double the Fed’s 2% inflation target. Importantly it suggests the Fed should be moving to tighten monetary policy. However, the trimmed-mean PCE was inline at 2% giving the Fed some “wiggle-room” for now, but likely not for long.
h2 Tracing The Nikkei/h2Parabolic moves have been seen in many market indices throughout history. In the U.S. such was seen leading to the peaks in both 1929 and 1999. In Japan, it was the Nikkei rocketing higher to the peak in 1990. The importance of parabolic moves is they take years to recover from after they burst.
For the Nikkei, despite a QE program 3-times larger than the U.S. on a relative basis, it still remains below its previous peak 30-years later. As discussed in today’s blog post, the U.S. has a lot more in common with Japan than you might think.
h2 Continuing Supply Line Problems/h2The Fed is complacent about fighting inflation as they believe it’s transitory. They consider temporary impediments to the production and shipping of goods but think these problems will resolve relatively quickly. Bloomberg has an interesting article out which leads one to believe the supply problems may last longer than the Fed believes: The World Economy’s Supply Chain Problem Keeps Getting Worse. Here are a few noteworthy lines and a graph:
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