- Risk markets have rebounded nicely on hopes of a heightened, rapid response from the Fed. We have yet to hear an official statement on policy, which may not occur until the Jackson Hole symposium.
- With deflation and recession now the primary risk market participants are focused on, this week’s PPI and CPI releases will be met favorably only in the event the data come in around the 0-.2% month over month range. Overages could be interpreted as stagflation while any negative prints will further recession fears.
- I wouldn’t be surprised if equity markets attempt to make another low before turning up for good. I do not think the macro picture currently suggests imminent recession. More erosion in the data is necessary before that call can be made with more confidence. I do think there is upside tail risk given the degree of bearish voices across financial platforms that are likely using last week’s selloff as confirmation to de-risk more fully. That could be a big mistake should then end up pressured to close shorts and/or go long again.
- The Fed’s response remains a critical variable. A hard pivot away from tight policy could set up a late 1998 situation that led to one of the greatest bubbles in equity history. If they remain steadfast in their tight policy, markets are likely to have topped for the intermediate term.
