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Chart of the Day - March Madness
Not a particularly good way for the Illini to end the men's basketball season yesterday, failing to show up for their game against Arkansas. It was never close and we end the season, which had so much promise back in November, with a whimper
I imagine the Illini fans still feel a bit better than the Arizona and Virginia fans who probably had higher expectations. Illini fans had been prepared for this by the poor play of this team the last few weeks. It is interesting how expectations play a big part in your view of events

Speaking of expectations, the market's hopes for the FOMC meeting next week and this year have also changed quite a bit in the last few weeks. We can see in the yellow line below, the expectation for terminal Fed Funds has fallen from 5.7% to 4.79%

Rate hikes that were priced in have now backed off to maybe 25 next week. Rate cuts, that Powell had take pains to get the market to price out for 2023, are now back with abandon

It is not surprising given the extensive problems in the banking system highlighted by the discount window borrowing which exploded this week. The thought is that the Fed needs to cut rates to help the banks

The problem is, the data is giving a different picture. If we look at the white line below, that is the Atlanta Fed's Nowcast for GDP. This uses the most high frequency data to predict where GDP will come in. The forecast rose to 3.25% in real terms

There is also the Atlanta Fed sticky inflation measure. Sticky inflation is often associated with cost-push factors, i.e. factors which cause a rise in the inflation rate but also lead to lower spending and economic growth.
This number is still at 6.7%

These growth and inflation numbers are more indicative of a Fed that should hike 50 bps, not one that should consider cutting soon. This is the conundrum the Fed faces

If it does nothing, the mkt freaks out because things must be bad with the banks. If it hikes to forestall inflation, the mkt freaks out because the Fed is being naive to the problems of banks and causing more problems

My best guess is the Fed tries to walk the tight rope, still hikes 25 bps, discusses pausing to assess the impact of lagged policy, reiterates the extensive liquidity provided to banks, and suggests it would continue hiking should the data warrant

However, the FOMC is dealing with a market that has perhaps very different expectations than the reality of the ability of what the Fed can and can't control

This time of year, managing the expectations of those that follow you closely, that create their schedule to be able to watch everything you do, can be very tricky if not impossible

That is why March Madness can be so exhilarating but also upsetting, depending on which side of the outcome you are on

Stay Vigilant
#markets #investing #stocks #bonds #FOMC #marchmadness

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