All eyes on FOMC: March 16 & 17th 👀
The most significant event in markets this week is the March 16-17 FOMC Policy Meeting, at which the Federal Reserve Committee will review the latest economic and financial conditions. With little market-expectations for interest-rate monetary policy changes, all eyes will be on the first dot plot of the year and Chair Jerome Powell's press conference. Meanwhile, 10-year Treasury Yields have topped 1.6%, pricing in expectations of a stronger economic recovery, and markets will be watching to see if the Fed will take action in response to rising rates. Economists surveyed by Bloomberg estimate for two 0.25% hikes in 2023 (e.g. Fed Funds should be 0.5%-0.75%).
How we got here:
- The Pandemic: In 2020, as the COVID-19 pandemic grew into a global healthcare crisis, GDP collapsed at a 31.7% annual rate from April through June 2020, the worst three months on records dating to 1947. In March and April combined, employers slashed a record 22 million jobs.
- The Stimulus: In 2020, Congress appropriated nearly $4 trillion for COVID relief packages, roughly 6x the fiscal relief in the first two years of the 2008 Financial Crisis.
- January 26-27, 2021: FOMC maintained 0-0.25% fed funds target range, $80 billion per month in Treasury purchases, and $40 billion per month in MBS purchases.
- March 4, 2021: "We're still a long way from our goals of maximum employment and inflation averaging 2% over time," Powell said in an interview at The Wall Street Journal Jobs Summit.
- March 11, 2021: President Biden signs a $1.9 Trillion American Rescue Plan, clearing the way for $1400 stimulus checks for many American adults and a child tax credit.
There are two narratives.
The economy is improving & sustained inflation is here to stay.
- We're about to see substantial fiscal expansion.
- The U.S. topped 100 million COVID-19 vaccine doses administered.
- COVID hospitalizations are slowing.
- President Biden announced there would be enough vaccines to inoculate all U.S. adults by the end of May.
- The child tax credit could cut the child poverty rate in half and bring an estimated 5 million children out of poverty.
- 25-34-year-olds plan to invest 50% of their stimulus check in the stock market (via Deutsche Bank).
The economy is fragile & inflation is transitory.
- 10 million Americans are still out of jobs, a loss more significant than the 8.8 million jobs lost during the 2008 Great Recession. Another 2.2 million Americans are temporarily laid off. While both numbers are down considerably from their April 2020 highs, they remain elevated.
- Massive wealth and income inequality remains. The bottom 50% of U.S. households in 2019 accounted for just 1% of the country's total wealth vs. 76% for the top 10%. As @zackasync pointed out in response to @mikemcg's memo, Predicting Inflation & Profiting from it (https://beta.commonstock.com/profile/b2d3f80b-e136-4eec-bb3f-f7ce2405160d?top=memo/236b7029-5702-4aee-b67d-304226e810f1), there are some things we just don't have data for, including: "the degree to which inflation is not evenly distributed across socioeconomic groups."
Core PCE, the Fed's preferred inflation measure, remains historically depressed. Given the lack of inflation follow-through post the 2008 Great Recession, right now the onus is on inflationistas to prove that recent inflationary pressures (higher commodity/energy prices, higher yields) are here to stay.
US30 Year Treasury Yields: the big question is whether the breakout higher in yields will be sustainable long-term or whether yields will resume their historical downward trend.
As per the founder of Coatue, Philippe Laffont:
"Fun fact: Only 10pct of s&p companies grow 20pct or more. They have 100B of cash. Meanwhile the other 90pct have 1.8T in net debt. All the growth companies have the cash, the old companies the debt. Good luck competing against the innovators!" https://twitter.com/plaffont/status/1363590600747057154?s=20
Short-term, any news of the Fed tapering and increasing rates will continue to be a source of market volatility. Long-term, it shouldn't reduce the ability of companies with solid balance sheets, in industries with secular tailwinds, to generate organic business growth.
Fantastic memo! I've been like this: 👀👀 toward the Fed for the past week or so, as I've been waiting to see what they're going to say after a year of pandemic.
I have a feeling we're going to see market swings all week; however, I don't know how big or small they will be. Only time will tell!