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It is often penned the markets hate uncertainty.  There is near unanimity today’s outlook is the opaquest in at least two generations facing a multitude of cross currents.

Against this backdrop, Treasuries are posting the best start of the year since 1988.  The NASDAQ is heading to the best start of the year since 1999 and the S & P is experiencing its best January since 2019.

The accepted reason for the advance is an expected halt of interest rate increases by March and then a pivot in early summer that will produce a lower fed funds rate by year’s end.

The Fed has adamantly stated this will not be the case.

It can be concluded the markets do not take FRB Chair at his word.  Tomorrow will market participants be delivered a shocking new reality from the Federal Reserve?

An accepted market axiom is “Don’t fight the Fed.”  Another is “It is not what one does but rather why one does it.”

Has the Fed been backed into a corner forcing the Fed to send an extremely hawkish message to validate or support its intended policy and maintain authority/integrity?

Some think yes.

Earnings season continues to accelerate as 109 S & P 500 companies will post results in the next four days.  According to Bloomberg, results to date have been underwhelming as only 63% of reports have exceeded forecasts compared to the 85% rate of “previous quarters.”

Fourth quarter GDP surprised on the upside thus the issue is not demand focused.  Based upon corporate statements, a primary reason for the shortfalls are increases in labor and material costs.

Speaking of which, according to government statistics, nominal GDP or growth before inflation rose by 7.3% from Q421 to Q4 2022.  Real GDP was 0.96%.  Is this not textbook definition of boomflation where demand is strong but so are prices?

Economics 101 states Boomflation occurs when aggregate demand shifts to the right, boosting real output and real income while increasing inflation. [Note:  The late 1960s was the last era of boomflation according to Fed Vice Chair Lael Brainard]

Tomorrow three of the largest companies in the world are scheduled to post results; AMZN, AAPL and GOOG.   These companies were once viewed as impervious to the business cycle but this myth—as with all myths—has been painfully shattered.  How will the profits be interpreted?

Last night the foreign markets were down. London was down 0.75%, Paris down 0.43%  and Frankfurt down 0.49%.  China was down 0.42%,  Japan down 0.39%  and Hang Seng down 1.03%.

Futures are down about 0.40% ahead of a multitude of profit reports and Fed meeting.  The 10-year is up2/32 to yield 3.53%.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.