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THIS IS AN INTRADAY FLASH FOR CLIENTS OF FUNDSTRAT ONLY
Fed Chair Powell is speaking at the Brookings Institution and while his overall comments were the same tough love talk — “higher for longer” — he also made two comments which we interpret as hinting at the pre-conditions to change the Fed policy “playbook”:
- First, Powell noted that “while October CPI was a welcome development” he added soft inflation monthly reports have been followed by higher inflation.
- In other words, since he has little faith in inflation forecasts, in the past year, it made little sense to put much weight on one good month
- Second, he explicitly addressed the lag in shelter CPI housing rates (due to base effects) and noted that real trend is market measures and noted those are falling
Why is this a hint of a coming change in the playbook?
- If November CPI comes in soft, this is a major break in pattern
- We expect 0.3% or lower for core CPI and that would be two consecutive months of soft CPI, so our base case is the pattern breaks
- Second, he is essentially de-emphasizing the housing component in services CPI. Housing is the stickiest part and the most lagging
What is our takeaway?
- In our view, if Nov Core CPI comes in soft, which is any figure below 0.4% MoM, Fed will likely change its reaction function
- The notion of “higher for longer” comes into question
- The Fed could focus again back on “soft data” and not only “hard” data (CPI etc)
- It is entirely possible the Dec hike of +50bp could be the last hike
- Rates likely fall
- This is supportive of equities