Economy Loses Momentum

The stock market opened down this morning (Dow -855 pts; SPX -2.6%) as a result of yesterday’s Fed announcement, which was seen as more hawkish than expected. For the same reason, one would think the bond market should be down, but it isn’t. Treasuries and high-grade corporates are rallying because interest rate expectations are falling today.

The big takeaway from yesterday’s Fed meeting is that Jerome Powell intends to target higher interest rates for a longer period because inflation isn’t coming down fast enough. He essentially plans to choke off economic growth. I’ll say that investors are clearly at odds with that plan. Does he have blinders on? Should we even believe him? He downplayed the obvious—that disinflationary forces are already at work.

In a CNBC interview today, finance professor and author Jeremy Siegel noted that the Fed has been consistently wrong about its economic & interest rate forecasts over the past year. Their forecasts should not be trusted now. “They were way too loose before…and now they’re way to tight.” He asks why the Fed would “remain over 5% throughout [2023] even though [they] admit that all this data is going to roll over to…bring the rate of inflation down to the levels you need?” So he doesn’t believe the narrative. “You can be sure next year they’ll be talking about lowering rates.” John Brown, CEO of Ritholtz Wealth Management, agrees. “Don’t tell me that the Fed isn’t making progress on inflation.” [Fed Chair Powell] can say whatever he wants, but he cannot continue to raise rates with [Treasury bond yields] falling at the pace they are. The dollar has peaked. Rates have peaked. [The Fed will] be more bark than bite going forward.”

We got a raft of economic data today; I’ll briefly summarize. US retail sales dipped .6% in November compared with the prior month. On a year-over-year basis sales slowed to a +6.5% rate. In other words, consumer spending is slowing to a rate below that of inflation. Next, US industrial production ticked down by .2% last month and factory capacity utilization also declined a bit. The Philadelphia Federal Reserve’s Business Outlook Index fell more than expected, as did a New York regional manufacturing index. Taken together, the data suggest a loss of momentum compared with September & October.