- Economic data has firmed remarkably quickly. It’s now unlikely that we will get any action from the Fed until the September meeting, which carries only a small chance of a 50-basis point cut (25 bps is guaranteed). As I mentioned in the last two observations, firming of data was one of two conditions needed for risk to rebound (the other being Fed intervention). CPI came in just right at .2% month over month, jobless claims were lower than expected, and retail sales surprised big to the upside.
- Interestingly, when looking at past capitulation trades, the market shows considerable strength. For example, immediately following the failure of Bear Sterns in March of 2008, the S&P went on to rally 14.5% before finally turning back down. The Japanese Yen carry trade embodies a micro fraction of the degree of systemic risk that the Bear Sterns failure did.
- Is a recession possible when M2 money supply is still nearly 15% above pre-Covid trend growth? Sure, the curve has shifted permanently upward in response to the fiscal stimulus of ’20-‘21 and prices as measured by the CPI have essentially caught up, but M2 year over year growth bottomed in April of 2023 so unless we start seeing defaults the primary trend remains up. Thus far I see no signs of widespread failure resulting from the carry trade.
- One thing to keep in mind is the additional firepower kept on the sidelines for now in the form of the Fed’s balance of RRPs. The FOMC ceased injecting liquidity in April of this year when inflation fears reemerged. With deflation fears now on the rise, $813 billion is ready to be put to use. This bodes well for risk if the Fed assumes a defensive posture before further signs of trouble.