Blame traders living in rate cut la-la land — not the Fed — for recent market
Consensonomics gets an ‘F’ In the last two months of 2023, the market added an additional percentage point of rate cuts to its year-end 2024 expectation, taking the total quantity of quarter-point rate cuts priced in to seven. Looking back, most consensus forecasters pointed to Jerome Powell’s “dovish pivot” and the new FOMC December dot plot calling for one additional 2024 cut as the primary drivers for this heightened exuberance on rates. Fast forward through the first four months of 2024 and all of those extra cuts have been been wiped out from market expectations, plus a little bit more. The reset caused the S & P 500 to post its first decline (albeit modest) in April in six months. .SPX YTD mountain S & P 500, YTD And naturally the consensus forecasters, who are all licking their wounds, want to find someone to blame other than themselves. Cue the Fed bashing. Cue the whining about being led astray by Jay. Cue the stories of fiscal excess from Janet Yellen’s deficits. Well, I’m going to provide an alternate narrative — a much more straightforward story. The real story The market overreacted and got it wrong. That’s it – the consenseconomists got an ‘F’. Instead of looking for a scapegoat in Jay or Janet, how about folks just toughen up and take the ‘L’. The consensus messed this one up. This isn’t Jay’s fault. He didn’t fumble on the 5-yard line as Stanley Druckenmiller suggested this week. The market got sacked for a near 100-yard loss. And while I’m certainly no fan of the regulatory side of Yellenomics/Bideconomics, blaming everything that goes wrong in the markets on fiscal excess is getting so very tiring. This year the rate markets have come back to a more sensible reality after flirting with the la-la land of 7 cuts. And all the while, the more sensible equity markets have paid only fleeting attention to their rate brother’s whining. As a guy who was brought up in the fixed income and currency markets, I’m increasingly finding more sensibility in the equity markets as I head into later stages of my career. Rate folks always overthink and overanalyze, and they always to get into more trouble. Equity peeps tend to just keep it simple. And in the spirit of simplicity, let’s take one last minute to celebrate what Jay has done in the last few years to anchor long-run inflation expectations in the face of one of the greatest negative supply shocks in modern history. His achievements have been nothing short of incredible. Having five-year inflation expectations (as measured by the 5-year breakeven inflation rate) never ramp higher while cumulative inflation surged around 20% since January 2021 is a testament to his stalwart success. And this protracted yield curve inversion is another sign of market confidence in his unending desire keep the ghosts of the 1970s away from the FOMC table. There have been no fumbles at the Fed so far during a protracted fight to ensure anchored inflation expectations and long term price stability. And I don’t expect any coming down the pike. (Watch David Zervos discuss this commentary on CNBC’s “The Exchange” Wednesday at 1 p.m. ET.)
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