Talking Points: August 26, 2022

Stocks having their worst single day performance since June on Chairman Jerome Powell reiterating what he’s been saying all year long: the Fed is dead set on fighting inflation and will not pull back on rate hikes until they see enough evidence that prices are coming down.

• The Fed is intent on not repeating the mistakes of the 1970s where they prematurely loosened monetary conditions which led to inflation’s resurgence later in the decade.
• Because of this, the market’s hoped-for “dovish pivot” seems unlikely at least through the end of this year.

Powell committed the Fed to “taking forceful and rapid steps” and to “keep at it until we are confident the job is done.” (emphasis added).

Today’s volatility is noise—recall that a market pricing in perfection makes it extremely fragile—but it does indicate a resetting of expectations to a more realistic bent.

• Inflation is still much too high and tighter financial conditions will hurt the economy and company bottom lines.
• Sideways and negative volatility through the market’s worst month, September, are to be expected in the run up to the next round of rate hikes on the 21st.

POSITIVES:

1. University of Michigan Consumer Sentiment for August, while still low, beat expectations.
2. Inflation expectations, which play a significant role in the life cycle of rising prices, decreased in August.
3. Q2 GDP growth was revised upward; it’s still negative but not as deeply negative.
4. PCE inflation, the Fed’s preferred measure, eased in July month-over-month and year-over-year.

NEGATIVES:

1. S&P Composite business activity index came in at contraction levels for the month.
2. Regional manufacturing indexes continue to show deep contractions  in activity.
3. Trimmed Mean PCE inflation (this excludes all outlier prices) still advanced in July although the pace of the increase was mild.