All I Want for Christmas is a Fed Pivot...

Markets are pricing in a recession by 2023 year end. Many believe the fed has overtightened and financial conditions will kill growth. Less spending, lowering earnings and less jobs. In today's market environment an environment a recession is actually bullish for equity markets. A recession would bring down aggregate demand and inflation. This would allow the fed to revert the economy easy monetary policy and markets will price in interest rate cuts. In this scenario, we would see an increase in growth stocks, Bonds, Gold, EURO, Semis...etc.

On the contrary, there still remains the upside risk of inflation being more persistent than expected due to a more resilient US economy. economic growth in Q4 is ~ +3.5% and consumers are still strong. The savings rate is at an all time low signifying that stimulus is still in consumer's wallets.


So are you expecting a recession or will we stay with tightened conditions. The above chart shows where price will gravitate towards under the two scenarios.
1. The first chart shows the US10Y with XLE(Energy) overlaid. A recession would lead to lower growth prospects decreasing both XLE and US10Y. On the other hand, a high inflation environment would mean that energy prices would rise due to more steady demand and yields would price in the accompanied economic growth.
2. Next we will take a look at the Dollar. A recession would be very bearish for the dollar due, to US treasury not paying out as much for those holding dollars. This would allow the EURO to increase.
3. Gold does well whenever real interest rates falls. Like when there is a recession.... If higher inflation is here to stay, real interest will increase as, the fed attempts to slow economic growth further.


We have entered an environment riddled with moderate inflation. The last 10 years, Tech boomed. In the next 10 years, commodities will. I see the US economy's increased resiliency and higher than expected growth to be the reason rates stay high leading the fed to tighten more. I am looking for 4.5% - 6% on the US10Y. But, everyone is pricing in a recession by Q4 2023. Leading to the decline in US10Y (long bonds) and the dollar. A lower dollar increases prices of commodities and lower rates make for easier economic conditions. The exact opposite things we need to bring down inflation. The fed pivot narrative is stimulating the economy, leading to more inflation. So, maybe the US10Y goes down a bit before going to 6%???? or it goes up a bit before going to 3%???? This a very confusing market so, I urge you to tread carefully and only invest in what you understand. I can't see the future, I observe the clues the market gives me, manage risk and hope for the best.....



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Dear Santa.....

All I want for Christmas is a Fed Pivot... Please?