Market returns
A very strong bounce back in the latter half of July, particularly with the perceived Fed dovishness, that lit markets in general and growth strategies in particular.
In commentary Chairmen Powell did away with forward guidance, and pointed to emergent weakness in several economic and market indices. The takeaway for the market was “hawkishness” is on hold, and maybe the doorway to “dovish” is open.
The market believes that inflation will be transitory, and thus the Fed doesn’t have to go so hard to wring it out of the system, and Powell making a seemingly congruent admission reduces the likelihood that the Fed overtightens and triggers a recession.
So half the story here is about the Fed not ruining the party and the other half is about lower rates (and associated lower USD) reigniting growth and commodity stocks.
Credit spreads also moved tighter, which is consistent with a dovish interpretation.
We think the market has gotten this wrong.
The interpretation is off. He wasn’t being that dovish. The employment cost index (wages data) and PCE (inflation data) that came out on Thursday and Friday don’t give room for a dovish tilt.
The Fed will stay on the hawkish path, for a little while longer, we think. The market has gone too early.
As such, we are inclined to fade the recent market strength, and are waiting to see where it levels out, before making a change.
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