Demand and Supply and Things Like That

Market-implied expectations for the current Fed hiking cycle haven’t gotten worse as Fed rhetoric has heated up. But they haven’t gotten better since the June FOMC, either, yet stocks have rallied more than 11% from their mid-June bottom. The resolution could be that Powell needs to see either a meaningful drop in inflation or a meaningful move toward recession – it’s a death-race to be the factor that ends this hiking cycle. Inflation is already falling, following the peak 19 months ago in money supply growth. And there is little evidence other than GDP that the economy is heading toward recession. The labor market is especially strong despite the Fed’s tightening so far, while a huge output gap still remains. Consumer finances indicate resiliency and anti-fragility in the face of tightening financial conditions. Forward earnings fell slightly over the summer, but started growing again a month ago. The equity risk premium indicates there is little chance of recession – but if one comes, there is no value-cushion to protect equity investors.