After J-Hole, Can We Get Back To War, Energy, Inventory, China And Stimulus?

By Peter Tchir, strategist at Academy Securities

Powell sounded as tough as he could on inflation he tried to “correct” some of the market’s “misperceptions” from his press conference at the last FOMC. Today’s format was not conducive to letting his inner dove out.  It’s still there, but he had a mission today and a format that let him carry out his mission. 

He leaned towards moderately higher, definitely longer, with a tilt to fight inflation at expense of economy.  But the inner dove is there and while the September meeting is now most likely 75 bps, the future is as uncertain as the data 

War and the European Energy Crisis. FX markets are paying attention and things do not look good. A recession with rolling blackouts may become the “best” case scenario (for now the situation has only deteriorated to base case). 

Not sure where to put Iran and nuclear deal, other than that the more cynical members of the GIG express concerns that we risk fixing a short term problem (oil) with a longer term problem (a nuclear weaponized Iran). Some think the deal is workable but just like I was dubious Russian sanctions would work (they aren’t) I’m dubious about our ability to monitor and contain Iran’s nuclear ambitions. 

Inventories. This remains my biggest concern. While not quite related, today’s talk, and price action so far do not spell good news for crypto. I continue to believe that crypto failing has far reaching consequences for markets and the economy. 

China. How bad is the economy? (It seems bad) will their stimulus be enough? Will they take actions on the geopolitical front (more support for Russia, more agitation around Taiwan) to district their population from the problems at home?

Stimulus. The executive order that wipes out some student debt (a big number in aggregate) and takes steps to limit interest payments could be very stimulative. It seems likely to be challenged, so it is difficult to bet on too significantly. This is on the back of the so-called Inflation Reduction act which also provides some stimulus, but with some potential tax consequences. Ultimately the stimulus could provide a boost like what we saw during Covid, but it seems premature to bet on that.

Bottom Line. I’m skewed towards more risk off with stocks fading and credit spreads widening. 

On rates a “pivot” flattener makes sense with the front end under pressure but back end yields getting some support. This might be the right time for the 20-year to be star of the show. 

After today, I think the “bad news is good news” trading strategy will fail until more bad news is priced in, or the economy surprises me to the upside.