In today’s briefing:
- Fed Policy Outlook: US Stagflation Fears Come Full Circle
- Decision Time for Bulls and Bears
- Weekly Market Monitor Week 8 – Sticky Inflation, Moving Average Anxiety, and the Bond Yield Issue
- Fight the Tape, or the Fed?
- Steno Signals: Revisiting the Macro Regime Indicators Considering Recent Developments
Fed Policy Outlook: US Stagflation Fears Come Full Circle
- Fears about persistent inflation and stagflation have come full circle and returned to financial markets due to insufficient Fed tightening as measured by real interest rates.
- Service sector price increases have replaced commodities as the main driver of inflation, thereby presenting the Fed with a big challenge due to their greater importance in the economy.
- Adjustment to the Fed’s policy framework is required due to the resilience of the real economy to policy tightening. A higher terminal level of the federal funds rate is required.
Decision Time for Bulls and Bears
- As the S&P 500 tests a critical support level as defined by the falling trend line, it’s technical decision time for both bulls and bears.
- A break of support opens the door to considerable downside risk to the 200 wma at about 3715.
- On the other hand, a relief rally is likely to be capped at resistance of about 4180.
Weekly Market Monitor Week 8 – Sticky Inflation, Moving Average Anxiety, and the Bond Yield Issue
- There still is an abundance of inflation out there. Eurozone ‘Supercore’ inflation has not peaked and is now at 6.0%, while US Core PCE stunned markets by accelerating.
- The S&P 500 Index SPDR S&P 500 (SPY US) has closed within 1% of the 200-day moving average. Dropping below it, would trigger another sell signal.
- The 2-year US Treasury Yield has made news high, but stock market valuation has not followed, providing additional downside for equities. Yields Up? Add Another 10% Downside for Stocks!
Fight the Tape, or the Fed?
- Increasingly, the market narrative is shifting from a growth slowdown to no recession and continued growth. Rising global liquidity is also putting a floor on the price of risky assets.
- The February FOMC minutes warned, “Participants observed that a restrictive policy stance would need…”
- What should investors do? Fight the tape or fight the Fed?
Steno Signals: Revisiting the Macro Regime Indicators Considering Recent Developments
- The Macro Regime indicator points to an improvement in March
- Inflation wreaked havoc with the regime indicator model in February
- Will inflation re-decelerate in March/April? Our forward looking indicators suggest as much
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