Guys, glad to be back, I mean that. Tuesday I was away from my structured schedule hence the missed macro breakdown, but I had to deliver for you all today!

As always welcome back to Market Macro Hub!

Jay Powell shook the markets this week with his speech so we’ll uncover everything you need to know from his Wednesday speech.

Enjoy ;)

The Good And The Bad: Powell’s Speech

On Wednesday, Fed Chair Jerome Powell delivered a speech that many may call the “Fed pivot”. But was this really a Fed pivot, or did markets just take it out of proportion?

Jay Powell confirmed what we were thinking, at the upcoming Fed meeting in December, the Federal Reserve will slow the pace of rate hikes. Now, you can imagine how markets reacted to that, the most powerful central bank has just announced they’ll be slowing down and taking their foot off the accelerator. Risk assets popped.

I mean, popped!

Figure 1: U.S Equities closed higher over a 5-day period

The Nasdaq closed Wednesday trading north of 4%, and the S&P up over 3%.

Ok - you get the point know. Markets reacted with confidence that the Fed would stop/slow down the pace at which they are hiking interest rates. All positive, right?

Not exactly, you see, markets seemed to latch onto one message. That being

The time for moderating the pace of rate increases may come as soon as the December meeting

— Jay Powell, Fed Chair

but completely ignored hints and direct intel that:

restoring price stability will require holding policy at a restrictive level for some time

— Jay Powell, Fed Chair

So although the rate at which the Fed will continue to hike rates will slowdown, financial conditions within the economy will remain tighter for longer. So here comes the big question.

What’s the good and the bad?

The bad news first.

Figure 2: NFCI Index

Let me deconstruct what this chart means if you can’t already tell. The national financial condition index shows how tight or loose financial conditions are within U.S money markets, debt markets, shadow banks and equity markets. Here’s another view point of financial conditions within the U.S.

Figure 3: NFCI Index Subindexes

Now you can see the components that make up the national financial conditions within the U.S. The idea is when the national financial conditions index is positive, as shown in 2006-12 & 2019-20/21, this is historically associated with tighter-than-average financial conditions. And for negative values historically this is associated with looser-than-average financial conditions.

So after Jay Powell’s speech on Wednesday we saw the risk metric index, alongside credit and leverage all move towards the average of 0. This is something you wouldn’t want to see as you tighten monetary policy within the economy, interest rates are at 4% within the U.S, the housing market is experiencing major slowdowns, growth as mentioned by Powell is also expected to be flat across Q4. So the figure 2&3 above reiterate the message that financial markets are clearly disconnected from the economic picture as a whole; for inflation to return to 2%, the acceptable and well functioning level, financial markets have to experience further declines in gains, liquidity & overall bullish investor sentiment in order to help the Fed bring inflation lower. So throw your bull hats away, it’s risk off season for the near future.

This year, GDP was roughly flat through the first three quarters, and indicators point to modest growth this quarter

— Jay Powell, Fed Chair

Further evidence of financial conditions weakening is the yield of U.S10y, (don’t mind the subtle flex of the Bloomberg terminal, an expensive tool I must say!)

Figure 4: US10Y (bloomberg terminal)

The decline in US10y shows how investors are now betting on a lower terminal rate of interest from the Fed. Out with the safehavens (bonds, dollar) in with stocks & crypto, with BTC trading up >5% on Wednesday!

I know it seems like I’ve gone on and on about the bad from Jay Powell’s speech, honestly speaking, it’s because there’s so much to talk about.

The good?

With the Fed potentially drawing near to the end of their hiking cycle this puts less pressure on central banks around the world to continue hiking rates in accordance to the largest and most powerful central bank, the Fed. Once the Fed truly pivot, and pause hiking the rest of the world are able to evaluate their hiking cycles and proceed towards the same outcome. Emerging markets and frontier markets started hiking before the Federal Reserve began hiking interest rates; so it’s safe to say that EM/FM countries are at the end of their hiking cycle and could potentially outperform developed markets through 2023, but I’m no expert on EM/FM markets, the main point is with the Fed easing off their hiking, there’s less pressure on these emerging nations to restructure debt/issue debt. As that has been the story over 2022, a tale of debt defaults and restructuring.

As of today U.S CPI came out and there’s some hot topics you guys have recommend so I’ll be covering that next week!

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Until next time