Powell’s tough talk justified by incoming inflation data.
Slowing growth unlikely to derail Fed’s plans.
Bull market re-birth struggling with labor pains.
Our bull market re-birth checklist took a step backward but a tough labor does not preclude a successful delivery. Without new complications from a macro perspective, we are willing to be patient and trust the thrust. At the same time, however, so far this year stocks have yet to show that they can sustain strength when yields and the dollar are rising. If the market is taking the Fed at its word, then higher bond yields are likely to be seen this year, in the US and around the world. Japanese yields are again approaching the 0.25% level that the Bank of Japan has targeted as a ceiling for yields. When that happened in Q2, the yen suffered.
Beyond financial market fluctuations, the tough line from the Fed could be tested by economic realities this Fall. Regional Fed survey data shows new orders contracted in all five of regions for the second month in a row in August. The averages of both the new orders and overall composite indexes were negative for the third month in a row. In recent cycles, the Fed would be cutting rates at this point, but now it is talking tough about continuing to tighten. That does not mean that the market signals are wrong, but it does speak to a challenging macro backdrop.
