JPM: "For countries that see CPI exceed 5%, it takes around 10 years for CPI to fall back to 2%.”
“For DM countries that see CPI exceed 5%, it takes around 10 years for CPI to fall back to 2%.”
FOMC Preview: Boil The Frogs Slower
Some summary points of note going into today’s event. Here are three things that will be watched at the FOMC announcement:
The Rate Hike: expected to be 50bp
The Dotplot Terminal Rate: expected to be raised from September’s (slower hikes/higher target reaction) 4.625% level to ~4.85%
Powell’s rhetoric: wild card
This is straight forward. If the Fed should raise 75 bps (though odds are very much against it) things will get extremely ugly. Yesterday’s CPI increased chances of a 25bp hike (as opposed to 50bp) for February.
The dotplot is likely to be somewhat higher than September’s 4.625% for 2023 and money markets are pricing in a rate of 4.86%, implying a FF Rate of 4.75-5.00%. But how we get there ( 50 bps or 25bps a clip) is another story after yesterday’s CPI. All together up from Septembers levels, but down a little bit (was 5.0% before CPI) after cooling inflation.
Important to note, the Dotplot is as volatile as the market itself and unreliable in our view. But people keep watching it for discernable patterns which makes sense.
His comments last week at Brookings caused a very strong positive reaction from stocks. We believed he would use the speech to hawkishly attenuate the rally if CPI were low yesterday. Turns out he doesn’t have to given the pullback all the way to unchanged after a rip higher. He probably has 2 speeches to use: one if stocks are too strong, another if they are much lower. But his words will cause gyrations again.
Hawks vs. Doves:
Hawks will cite the improving Financial Conditions index which actually signals more ease than before we started this.
You can pick your poison. Goldman1 (from their slide show) which had been more hawkish citing their FCI analysis above, or the slew of slowdown data with emphasis on the M2 factor also pictured.
After today’s event is digested we expect markets to look towards earning season in mid January for its next reality check. Before then, the end of year reallocations and EOY selling will take precedent. If yesterday was any indication it will be bizarre for stocks and oil, yet predictable for Metals.
Why Gold is OK. The 10 year plan
More money is going into Gold again as incoming dovish expectations also lead to exacerbated back-end inflationary pressures later. It is hard to make a case to not own a little Gold given the state of trust in government, markets, and politicians these past few months. Justified or not, the older stock investors are increasing their GLD and SLV in proportion to their fears of a return of what we just experienced. Younger ones would be smart to pay attention.
BTW- we don’t know why everybody is crowing about 7.5% inflation as a dovish moment. It isn’t. It is more like relief Powell wont crash stocks any more. It’s easier to boil investor frogs in debasement than it is to resuscitate them in depression
Consider this little data point from JPMorgan in which after revealing their Emerging Market client base fully expects Fed funds to eventually top out between 6-7% over a longer time frame made this bone-chilling comment:
"Conversations with our EM client base reveal views that Fed Funds likely needs to reach the 6 – 7% range. Why? For DM countries that see CPI exceed 5%, it takes ~10 years for CPI to fall back to 2%."
In fact a higher terminal rate than 5% had been mentioned in recent Fedspeak by Evans and Williams last week.
How to factor that in? It means that the Fed knows full well that to get inflation down to 2% in a shorter time frame they would indeed be forced to crash the economy. Therefore the boiling of frogs is just getting under way. Maybe they turned the heat down to simmer now. You do not need any more proof of the plan for debasement, financial repression, and those with honest ( but inept) hearts in power just hoping it turns out all right.
Ten Years to 2%?
We said bone-chilling because it has direct analog to the 1970s great inflation in which they got inflation temporarily under control in 1976 just in time for the bicentennial celebrations only to unleash hell soon afterwards. Our Father said to us then:
They have taken big risks to get inflation under control and keep the celebration positive for business. Watch what happens after July 4th…
And as a result of that prediction and outcome we have been well aware of that analog for the past 6 months in our comments to readers. Here are a few posts on the topic
Even Pozsar said: Inflation will be here for 5 more years
"Two Percent Inflation is a fairy tale translating into even worse inflation after the next recovery."
10 Year investor Outlook
Here's the full context of that JPM comment from "Thoughts on the Terminal Rate"
The Fed typically will hike until Fed Funds exceeds CPI, which intersect in May 2023, should our Fed and CPI forecasts prove correct. Should CPI prove a bit more stubborn than forecast, could we see the Fed continue with a series of 25bps hikes beyond the March meeting? Conversations with our EM client base reveal views that Fed Funds likely needs to reach the 6 – 7% range. Why? For DM countries that see CPI exceed 5%, it takes ~10 years for CPI to fall back to 2%. A higher terminal rate than 5% has been mentioned in recent Fedspeak by Evans and Williams last week.
So maybe it plateaus at 4.85% before inflation reignites, like it did in 1976. One thing is almost definitely sure. The target rate will be raised to at least 3% when all is said and done. Continues...
Continue (ZH Special rate) reading here including footnotes.