This Mess Is Manageable
And resilience is a wonderful thing.
Things are getting a little sloppy.The CBOE Volatility Index $VIX poked up to a year-to-date high last Friday on rising fear of a wider war in the Middle East, with crude oil and gold following along in anticipation of further supply constraints and on desire for safety, respectively.
Markets continued to digest Jerome Powell’s Tuesday afternoon discussion with Bank of Canada Governor Tiff Macklem during which the Federal Reserve Chair suggested we could be looking at higher interest rates for longer than anyone anticipated at the start of 2024.
I’m a big fan of utilities – these are essential services, people – but when that group is the best performer on a given day it’s a sign investors, traders, and speculators are in search of some cover.
The Nasdaq Composite and the Russell 2000 led the way down, with the Dow Jones Industrial Average nearly pulling out a green number and the S&P 500 ultimately shedding 0.39 percent.
Crude oil was down about 3 percent, and gold eased back after rising above $2,400 an ounce during the session. Time seems to be chipping away at short-term geopolitical risk premia.
For those with well-developed short-term strategies, these can be pretty good times: more volatility, more mispricing, more opportunities.
Those looking further out on the time horizon will be mindful of the broad and basic up-and-to-the-right bias for stocks, a trend that dates to the middle of the 19th century.
That chart is pocked with multiple geopolitical cataclysms interpreted in those moments as the very end of the world, a statement that holds even for the period before 1945.
There really is no good time to panic.
The environment Timmer describes includes a resilient US economy characterized by fiscal dominance, monetary restraint, and dollar hegemony.
Timmer’s thesis is “that hard assets are an antidote to fiscal dominance, despite dollar strength, and if the term premium is rising.”
Meanwhile, the European Central Bank remains committed to cutting its benchmark rate in June, which would make it the first to move in the new cycle.
Potential divergences between and among global central banks invites potential for more dollar strength, pressure on other currencies, and the US export of inflation.
At the same time, with Citigroup $C reiterating its call for 125 basis points of rate cuts this year, there is now an undercurrent of dissent on the “higher for longer” narrative that developed after last week’s release of inflation data for March and Tuesday’s remarks by Powell.
We discussed yesterday State Street Global Advisors CIO Lori Heinel’s view that the current inflation picture supports a rate cut and the Fed will begin to trim well before the November election to avoid political complications.
This would require Powell – a lawyer and not an economist by trade, a distinction with a big difference – to move off his case-based “incoming data” position toward a more model-based “skate to where the puck is moving” position.
Powell did note that “we are very, very aware” of the impact “higher for longer” US rates could have on the global economy.
We won’t know whether that marks the beginning of a new operative statement – an update on Powell’s “incoming data” position – until the press conference following the Federal Open Market Committee on May 1.
Even at its Friday peak of 19.56 the VIX – the “fear gauge” – is still below the 52-week high of 23.08 it hit on October 23.
Seems like people are starting to feel the move off the December 12 52-week low of 11.81.
