In today’s briefing:
- Hawkish Fed Faces New Challenge as US Treasury Examines Ways to Improve Market Liquidity
- The Hidden Story of Investor Capitulation
- Peering into 2023: A Bear Market Roadmap
Hawkish Fed Faces New Challenge as US Treasury Examines Ways to Improve Market Liquidity
- US financial markets have been persistently wrong to entertain thoughts of an early dovish pivot to Fed policy conduct without unambiguous evidence of returning price stability.
- The Fed’s pursuit of quantitative tightening will raise the federal budget deficit via higher net interest costs and lower tax revenues due to slower economic growth.
- Diminishing liquidity in the US Treasury market could force a bond buyback programme that potentially complicates the Fed’s quantitative tightening programme due to its impact on bank reserves
The Hidden Story of Investor Capitulation
- The good news is that retail sentiment is more washed out than generally believed.
- The bad news is the stock market faces a number of short-term challenges in November.
- Uncertainty over the midterm election and a possible fiscal fallout, a likely hot CPI report and bearish World Cup seasonality will create headwinds for stock prices.
Peering into 2023: A Bear Market Roadmap
- The Fed has made it clear that it wants to tighten monetary conditions by engineering an equity bear market.
- Assuming the economy enters recession in Q4 or Q1, history shows that it will emerge within about six months, putting the timing of a bottom at about the same time.
- The S&P 500 is trading at a forward P/E of 16.1. Assuming a typical 15-20% cut to forward earnings estimates in a recession, this puts the downside potential at 2500–2850.
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