Will Powell Crash the Party on Wall Street?

We appear to be sitting at the punch bowl too long as we approach this week's Fed meeting and key data on the economy.

But are we?

Tuesday we get the consumer price index report and on Wednesday morning, the producer price index numbers. Later on Wednesday, the Fed will conclude its monetary policy meeting and issue its latest set of economic projections.

I don't expect the Fed to help the market when it presents this week, necessarily, but at the same, I don't see it posing as a hindrance. So far, I'm still barely bearish on rates, barely-to-mildly bullish on credit, slightly bullish on stocks, and very bullish on the laggards.

But amid the back drop of the wars in Israel and on Ukraine and China's woes, we've got a lot of moving parts, so let's dig in to the week ahead.

After the jobs report on Friday, we posited that the data was bad news for bonds and good news for stocks. Treasuries finished the day with higher yields, but ended the week barely changed from 4.2% to 4.23% on 10-Year -- with a dip to 4.1% on Wednesday. Stocks rallied, and finished up on the week, but barely, with no major index gaining 1% -- though the Russell 2000 came darn close.

Also, looking back at the last Fed meeting, the big takeaway was that the bond market had performed much of the Fed's work for it. When the Fed started its last meeting at the end of October, the 10-year real-yield (using the Fed's own "H15 Constant Maturity index") was at 2.46%. Today it is at 2.02% and broke below 2% during last week. The five-year, five-year forward break even yield, went from 2.48% to 2.27%, not quite as dramatic, but eye-catching.

The June 2024 Fed fund futures contract is currently pricing in just under two cuts between now and then. On Oct. 31, it was not even pricing in one rate cut.

But without a doubt the market has now undid a lot of the work it had done, and there is no way Fed Chair Jerome Powell can deny this. That is a bit concerning for bulls in any market, because we'll likely get questions on this subject. But don't leave the punch bowl just yet. We may have a couple reason to stay at this party.

First, while the moves have been large, 2% real yields are at best "neutral" and likely still restrictive. It was as low as 1.06% in April. In fact, it wasn't consistently above 2% until the end of September and was at basically this level when the Fed chose to do nothing at the September meeting. The Fed is likely to view the price action in the past month as leaving things much more balanced than they were before. which, lo and behold, fits our current timid view on Treasuries.

Second, the data, by and large, came in weaker this month. Not so weak that it fully offsets the change in market conditions, but extremely close. Basically, market conditions have changed to tilt the Fed to be more hawkish, but the data bends the Fed the other way.

The volatility in the data from the job openings and labor turnover survey and the University of Michigan Inflation Estimates seems too crazy to be true. The ongoing discrepancies between the establishment and household components of the payroll data seem almost unbelievable. For virtually every official data series that relies on survey responses, the response rates have gotten disturbingly low, and seem to be getting lower.

I really question the validity of the data, but it is what the Fed has and what the Fed will work with.

So, if you're still taking your last drink, know that we can stay in this mild risk-on positioning for a while longer, but stay sober, because at any moment, you'll need to understand when it's time to turn the other way. And fast.