Fed Cutting with Gold and Risk Assets Ripping
ISM Services Prices Paid suggest more upside to CPI
This morning the Atlanta Fed published their “Nowcast” for US economic growth in the third quarter. Historically, it has made sense to take these nowcasts with a grain of salt early in the quarter but later in the quarter, as we are now, these forecasts become more accurate. The message from the Atlanta Fed is clear: the demand picture in the US economy not only remains strong but may even be accelerating. Robust retail sales figures also released this morning show a consumer unphased by higher prices. Gold is breaking higher along with risk assets while the dollar is breaking down to three-year lows. In other words, the markets are telling the Fed and all market participants that there is a collective expectation of US fiscal policy makers (Congress and the President) ignoring deficits and monetary policy makers (the Federal reserve) continuing to ignore inflation.
Financial conditions are extremely accommodative. Credit spreads are tight and the wealth effect of stocks, rising home equity and even crypto are helping to fuel consumption among the top income (and top savings/investing) cohorts. Yes, the trend is negative in employment, but it has been for almost three years now. The large revisions to Non-Farm Payrolls don’t tell us that there is an inflection in unemployment, just the opposite. The reality is that job growth has been weak for some time but we now know that underlying wage growth and productivity are actually stronger than we thought.
Our view is that the overall economy is, while inexorably and profoundly bifurcating, strong and that the threat of inflation is much greater than the threat of recession. Overall, this is about as good a backdrop as you can get for risk assets: price momentum, an accommodative Fed, excessive fiscal spending, a benign credit environment and an administration that appears willing to break all traditional restraints when it comes to stimulating growth. The main risk we see to equities is that we see more dollar weakness that leads to a repeat of the foreign capital sell-off that we experienced this spring. Without explicitly saying that we are pursuing a weak dollar policy, our fiscal profligacy and monetary ambivalence to clearly accelerating inflation makes it is clear that is the case. In the immediate term, that is accommodative to growth but look at a weak dollar policy from the lens of a foreign investor. Are you going to be willing to risk further devaluation in order to own dollar denominated assets?
Markets love the money printing and “run it hot” mentality, but that is not to say there are not potential consequences longer term.
Tim Pierotti is WealthVest’s Chief Investment Strategist.
Tim has over 25 years of experience in various aspects of the equities business. Prior to joining WealthVest, Mr. Pierotti spent seven years in Equity Research management roles at Deutsche Bank and most recently at BMO where he was a Managing Director and Head of US Product Management. Tim has 11 years of investment experience most notably as Head of Consumer Research and Portfolio Manager at The Galleon Group, a former NY based $8Bln Long/Short hedge fund. Tim is a graduate of Boston College and lives in Summit NJ.
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