Sticking with the Bearish View
Expect risk asset markets to make new lows in the coming weeks as the Fed pushes to get ahead of the market on a tightening agenda to stomp out inflation.
I know I sound like a broken record but I am sticking with my playbook which is based on the idea that the key for risk asset price momentum revolves around duration of the timeline to a Fed pause/pivot. Since I don't see any reason why the Fed is going to slow down its tightening agenda here, amidst a sticky inflation environment and robust labor market, I think risk asset markets, particularly equities, need to see much lower prices first to bring about conditions that could allow the Fed to shift. At this point, the Fed is recognizing that the only way to bring inflation down will be via a direct attack on the wealth channel via stock and house price reductions that come from much higher rates and quicker balance sheet reduction. This asset price reduction will then get inflation expectations down below 2%, a necessary condition for them to even think about thinking about pausing, let alone cutting rates, while the hard data remains far away from their ability to shift. I believe we are going to see significantly lower equity prices in the coming weeks to get these inflation expectations down. Other asset classes are moving there rapidly with the $ rallying aggressively, credit spreads widening and the terminal rate marching higher. US equities are not surprisingly last to know.