Yet we were convinced. For more than ten years, central bankers have been there to help us, to lend us a hand and not to let the markets blow up when they should. We had even taken a liking to it and everyone had understood the concept of “buying on weakness”. Even during COVID, even while all economies were at a standstill and nothing worked, Central Banks showed us their support and flooded under cash to support global stock markets. And then, all of a sudden, when inflation explodes, where we need the most help from the FED, here it lets us down.
The Audio of August 29, 2022
The end of abundance
Yes, last Friday, when we had waited all week for a friendly nod from Jerome Powell, he let us down.
However, for a few days most of the “experts” around the world had begun to think that something had changed in the air. Since inflation had shown a small sign of weakness, we had begun to think that a pivot had taken place. So, well, don’t look in your finance books, a pivot is a term that we invented to say that the FED will change its tune, be “less aggressive” in its rate hikes , raise rates “only” by 0.5% in September instead of the traditional 0.75%. In short, gently switch from the HAWKISH side of the bad hawk to the DOVISH side of the nice dove. In any case, this is what we had hoped for as recognized finance experts for years.
And then actually no. As the excellent President Macron had announced after his morning Jet Ski session and his breakfast based on ortolans, eaten with his platinum cutlery cut especially for him by NASA: ABUNDANCE is over. We almost have the impression that Jerome Powell was inspired by what serves as President to the French to write his speech last Friday. Anyway, there is one thing that seemed clear in his words and his way of expressing himself: “It will be better one day. But first we’re going to take the brunt of it and that will be the price to pay to put inflation down”.
Then we can discuss the measures to take to get us out of the recession in which the FED will have planted us.
So, what are we doing for the recession???
The boss of the American Central Bank was therefore very clear:
“Rate hikes will hurt households and businesses, these difficulties are the price to pay to reduce inflation”
And he is ready to accept it since, in his eyes, inflation is more dangerous than recession. His choice was therefore made and he expressed it clearly on Friday. On the other hand, we, on the side of the marvelous world of finance, have only moderately tasted the thing. Obviously, the markets collapsed like one man. In Europe we will say that we have “limited” the breakage, but it is mainly because Powell’s announcement came out too late for us to have time to react fully to the news. We can imagine that we will correct the situation at the start of the week. But the US indices have been smashed clean in order and, while we imagined breaking the moving average of 200 days on the rise another 15 days ago, now we are wondering if we do not will not break that of 50 days – but downwards – in the hours to come.
It must be said that we did not expect a speech as Bearish or as Hawkish, it depends. One could imagine that Powell was going to announce a gentle balance between rising rates and the risk of recession controlled by the central bank, but one would not have imagined such a clear-cut opinion. It seems clear that the President of the Fed did not do half measures. We really get the impression that he did not want to leave any hope to the speakers, not to let them believe that he was going to do in half measures. Today it is very clear: the priority is to bring inflation back to at least below 3% and the risk of recession is secondary.
Besides, reading between the lines of Powell’s speech, one clearly gets the impression that he doesn’t give a damn about the US economy going into recession, as he said: it’s the price to pay. Once inflation is brought under control and put to rest once and for all, we can start discussing the recession soldier and how we manage to put two bullets in his head. For the moment, we will have to deal with a FED which has obviously gone over to the Hawkish side of the force for quite a while and that’s not what we like. In general.
Still a bit of hope
We are not going to fire too much on the ambulance either and we will note all the same that beyond the positioning of the FED, Powell explained all the same that he was going to “monitor” the economic figures for this beginning of the month before to make its decision on September 21. September 21, which will mark the end of the FOMC Meeting and the new rate hike. So that’s good, because it gives us some hope. A little hope that the FED will still think about what it is going to do and that we are not yet “100% sure” that the rate hike will be 75 basis points again . Right now we are at 95%, but there is still some hope.
Yes, because from now on in the qualifiers that we will use for the FED, if it raises rates by 75 basis points, it will be HAWKISH and if it only raises rates by 50 basis points, it will be DOVISH… Like it doesn’t really matter. Well, I have to admit that, for me, being DOVISH because we only raise the rates by 50 BP, it still means that the dove still has dreams of a bird of prey and that she would still do a field mouse hunt because she’s tired of eating seeds and dry bread.
At the gates of September
But hey, the market is like that and if you find that you waited too long last week, I can already tell you that you will still be waiting to see Friday’s employment figures. You will wait for the CPI numbers this week in Europe, then you will wait to see the US CPI numbers next week, before you wait to see what Christine Lagarde’s Central Bank does next. Yes, because that’s something else again: since the Jackson Hole speech, all the bankers who have a close or distant relationship with the ECB have come out of the woodwork to demand a substantial rate hike…
In short, you will wait to find out. And in the meantime, we will have to deal with a gloomy and depressing atmosphere, knowing that Thursday is September and that September is still historically the worst month of the year. Yes, me too, it makes me happy that it’s Monday and that the atmosphere is so shitty, whereas on Friday at 3:59 p.m., we still believed in the concept of buying on weakness.
This morning in Asia, the Japanese welcome Powell’s speech by plunging 2.7%, China and Hong Kong are limiting damage for the moment, but since they live on another planet, that doesn’t mean anything. In any case, we can see that the risky asset classes are “out of fashion”, since the new market indicator, Mister Bitcoin, is in free fall again and falls back below $20,000 for the 212th time. he still has to let go once and for all to get the stops below $16,000 and create a good panic. A little like the rest of the markets, a good fall cleaning might be welcome, just to reset the counters and stop suggesting that “the stock market is still easy, there’s only ‘to buy on weakness’.
Otherwise gold is at $1734 and obviously inflation or not, recession or not, nobody cares. On the other hand, it should be noted that since Powell’s speech, copper is under pressure. Well yes, of course, if the path of recession is the one the FED wants to follow, needless to say that copper, which is an indicator of economic growth – or not – will necessarily be put to use. And then, as far as oil is concerned, it’s still traded around $95. All that is needed is for it to rise above $100, just to add some fuel to the fire of the smoldering recession.
News of the day
On the news side of the day, there isn’t a ton of things to say except that everyone is coming back to the fact that central banks are definitely HAWKISHES and that several central bankers have taken the microphone to say that the years to come would be very complicated and full of challenges. It’s funny how suddenly the guys know how it’s going to be. It’s been years since they saw anything coming (neither did we for that matter), but all of a sudden, just to justify their huge salaries, the guys all have a 10-year vision! !! A bit like the vision they had of inflation a little less than a year ago.
For the rest, we analyze in all directions the speech of the FED, we talk about the fact that the cost of electricity in Europe is going to be very bad this winter (hey, it’s starting to come) and on the other side , BlackRock believes that the FED will screw everything up if they continue to raise rates and that the risk of overreacting is very great. Otherwise, one analyst believes that the Saudis’ wish is to keep the price of oil as high as possible to maximize their income – something that will surely help the concept of inflation in the States and elsewhere. And then otherwise, the Germans are clearly switching over to coal to prepare for winter since the plan to bring Putin to his knees involves putting Europe under water first.
Today, we are monday. There will be almost no relevant figures, but we can already start to warm up with the CPI in Europe which will be released in Germany tomorrow and in France on Wednesday. Well, in France they don’t care, they already know that abundance is over. Moreover, in the “joke” series of the year, the back-to-school speech of MEDEF – the French employers’ union – will be given by… Zelinsky… As a result, the Ukrainian President has become an expert in everything, even in economics. It must be said that as everything is produced in Ukraine, everything is thought out in Ukraine and everything is managed from Ukraine, he must know everything about everything and above all know everything. It’s still useful to be Macron’s best friend. And then if you want to wait a little longer, because you haven’t waited long enough, Friday there will be the employment figures in the USA.
For the moment the futures are clearly in the red and Europe should start a catch-up session. Anyway, at the beginning of the week we are in a new world. A world where the FED is no longer our friend will have to come to terms with it.
Good start to the week and see you tomorrow!
“I’m against having emotions, not against using them.”