🇺🇸Several takeaways from the #FOMC meeting
✔️Fed raised rates by 0.25%, bringing the range to 5%-5.25%.
✔️Fed deleted the reference to 'some additional policy firming may be appropriate' from its statement.
✔️Powell hinted at a potential pivot and ongoing assessment, stating "We feel like we're getting closer and maybe even there.
✔️Would not be appropriate to cut rates, given our view that inflation will take some time to come down.
✔️Powell stated that there's a possibility of a mild recession occurring, which he hopes will be the case.
✔️Fed will continue its balance sheet runoff.
✔️Fed plans to strengthen supervision and regulation for midsize banks and believes it's essential for the debt ceiling to be raised to avoid a US government default.
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ISM PMI is hugely important - it's used to forecast all kinds of stuff.
For example, PMI tends to lead corporate earnings growth by about a year.
Below, we shifted the PMI index forward by 12 months and plotted it against SPX trailing 12-months EPS growth.
Based on this relationship, today's PMI reading of 46.3 implies an earnings contraction of about 8% over next 12 months, or an SPX EPS of 204.
Using the current forward PE ratio of 18.7, this leads to an index level of about 3,815. A "recessionary" PE ratio of 15 will see the index at ~3,060, assuming earnings don't fall further.
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1/ The S&P 500 has suffered a total return of -10.3% since its steepest extreme in history.
The valuation measure best correlated with actual market returns is at levels never seen prior to Aug 2020, except a handful of months surrounding the 1929 peak.
I know you don't care.
There's far too much talk around these parts about how the dollar will be vanishing from global trade imminently, but the reality is this is a process that takes decades.
First, the greenback makes up nearly 60% of global foreign exchange reserves. That's pretty massive!
1/
Since March 2020, We Have Seen:
1. Largest pandemic in over 100 years
2. Over $4 trillion in printed stimulus
3. Interest rates lowered to 0% over night
4. Interest rates rising at their fastest pace in history
5. Inflation at its highest in 40+ years
6. Closest we’ve been to WW3
7. Oil prices go from negative to $100+ with record high gas prices
8. Largest crypto bear market in history
9. Record high credit card debt of $986 billion
10. Most unaffordable housing market in history (less affordable than 2008)
11. 2nd and 3rd largest bank collapses in US history
If you started investing in 2020, you have seen more historic events than most people see in 20+ years.
Volatility is the new normal.
1/4
FED'S BARKIN: THE CASE FOR RAISING RATES THIS WEEK PRETTY CLEAR.
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The market is now going the other way.
The terminal rate (blue) (from FF futures) and the actual rate (orange) have converged for the first time this cycle.
The market is signaling the Fed is done.
As for the $60 billion loan the Fed made via repurchase agreement, the countries below are the only countries that hold $60 billion or more of US Treasuries. If we remove sovereigns with SWAP lines open at the Fed and scan the list for countries that have been significant net sellers (more than $100B) of USTs in the past year, the only two countries that fit these parameters are China and Japan. Private market funding is 20bps cheaper than the FIMA Repo Facility and Japan has deep, positive relationships with the US Dealer community...so it appears that the secret borrower of USD from the FED could be China. How incredible is it that the FED has the ability to lend directly to the United States' largest threat to our National Security (without Congressional approval)? #China @federalreserve@chairmang@marcorubio@MarkWarner
18/ Thanks for reading!
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