Equites were bifurcated yesterday. The NASDAQ “slipped” about 0.5% while the Dow rose about 0.25%. Bloomberg writes about 400 members of the S & P 500 rose as the Magnificent Seven mega caps halted a nine-day surge before the release of TSLA’s and GOOG’s results.
Tariffs are still front, and center and the Treasury Secretary is predicting “a rash of deals” between now and the August 1 deadline. Bessent also stated he sees no reason for the FRB Chair to step down, perhaps alleviating some market angst.
Many hold the Federal Reserve Board as omnipotent and omniscient. This august economic consulting group has a legion of economists and experts to chart the direction of monetary policy based upon their readings of economic activity.
It was once written that the Fed for the last 12 years is “like zero for 300” in their forecast accuracy, stating further it is almost statically impossible to be as bad as their massive team of PhD economists has proven to be.
With the above written, why is there so much attention focused on the outcome of the 19-member group? The Fed sets short term interest rates. However, an argument can be made that the Fed is losing some of its luster.
The market states the two-year inflation breakeven rate is up to 2.76% versus 2.5% several months ago. The 5-year breakeven rate has gone from 2.40% to 2.54%. The market is clearly more concerned about and less optimistic about inflation than the FOMC.
The FRB is very clear about inflation. It is mostly related to tariffs, and they are waiting to see how these effects develop. The data suggest the tariffs may not yet be significantly driving inflation but appear to be contributing to inflation stalling at around 3.0%. Today’s major driver is still Owners’ Equivalent Rent (OER) or what someone can rent their home for if it was indeed rental.
Several years ago, the FOMC entirely underestimated the increase in OER and still believes OER will decline to offset the eventual inflationary impact of tariffs.
As noted several times companies, countries and others in the distribution process have been absorbing the tariffs which should impact margins hence valuations. It is widely believed it is not a question as to if these costs will be passed onto the end user but as to when.
Today’s environment is very convoluted and can go in so many directions.
Despite the drama, long term interest rates are still within the range of the last three years. There is a lot of confirmation bias amongst investors and economists. If you are convinced inflation is coming, you perk up when the news supports your views. Conversely if you think tariffs are awesome and will produce an economic boom there are also ample stories in the social media echo chamber to support these views.
The truth is that no one knows. The unexpected is constantly occurring as we are living in extraordinary confusing times.
After the close, both TSLA and GOOG post results. Will their releases add any clarity?
Last night the foreign markets were up. London was up 0.49%, Paris up 0.98% and Frankfurt up 0.47%. China was up 0.01%, Japan up 3.51% and Hang Seng up 1.62%.
Futures are up about 0.4% as a trade deal was reached with Japan and the Philippines. The 10-year is off 3/32 to yield 4.37%. For what it is worth department, the Japanese 40 government debt auction saw its weakest demand ratio since 2011.
