Discussion
Cross-asset market price action this week is a pristine illustration of the Fed’s H4L rates and stocks policy discussed in the most just published below.
Market participants will likely head into this weekend befuddled at how stocks can rip on an objectively hot NFP report that led to a sharp repricing of the UST curve. But it makes perfect sense in the context of the aforementioned H4L rates and stocks policy, which Nick Timiraos confirmed in his post-NFP FED communication.
In short, in order to keep stocks elevated and moving higher into Election Day, the Fed has de-linked economic growth and labor market strength from inflation.
Now, no self-respecting financial market participant actually believes the Fed is going to cut rates this year with a 5-10% of GDP fiscal deficit in place and the economy very obviously white hot. They’re going to continue to do this rate cut dance ahead of Election Day, and since the data are unlikely to cooperate for cuts by June, that means the data will have rebased and started working higher by the time of the December FOMC meeting, when I continue to believe they will restart rate hikes.