The Fed/China Doom Loop

A less hawkish FOMC failed to put a bottom in for stocks because of fear that the Fed is in doom loop as China locks down its large cities. Lockdowns will slow growth, which the Fed wants to see; but they will create scarcities that will inflame inflation, which the Fed does not want to see. That could cause the Fed to tighten more aggressively, doubling down on the anti-growth impulse imparted by the lockdowns. Powell is aware of the problem, but has not articulated an answer. China’s case-wave is already receding, so lockdowns could end shortly. S&P 500 forward earnings topped two weeks ago, but it’s all due to just Amazon. Credit spreads are widening, masked by high oil and gas prices. The Treasury yield curve has come out of inversion, thanks to a back-up in real yields that has taken the pressure off of market-implied inflation expectations. The S&P 500 Equity Risk Premium is about neutral, reflecting the markets’ dependency on headline resolution of real-economy risks.