To The Moon

I confessed. I did not stay up this morning to listen to what else Mr Powell has to say at the FOMC press conference at 2:30pm (US time).

I already (kinda) “know” that:

• The Fed is very very likely to pause interest hike in September 2023.

• The Fed will very very likely have one more interest hike before 2023 is out.

Does this show "blind sided" ?

What I was not prepared to find out in the morning (Asia time) was US market was spooked by what was Mr Powell has covered during the press conference.

Main “depressing” gist will be elevated interest rate is going to be here to stay for a long, long while.

This I believed is what spooked the market, really.

• The Dot Plot (see above) offers officials' forecasts for rates in the coming years, showed most Fed officials think one more rate hike will be needed this year.

• What is more interesting this time round are the changes to 2024, 2025, and first look at 2026.

• It offered even more clues about where the central bank sees things headed.

• Looking at the “future” dot plot forecasts, the Fed has already [a] away -0.50% worth of rate cuts for 2024, [b] -0.50% worth of rate cuts for 2025, and [c] suggested rates would end 2026 above where rates are expected to land over the longer run.

• What is “amusing” though was that throughout Mr Powell’s press conference, was his frequent emphasis that “these best estimates are just that — estimates”.

Along with its policy announcement, the Fed also released updated economic forecasts in its Summary of Economic Projections (SEP).

This is one piece of information that is not covered by most of the media report.

What is summary of economic projections (SEP)?

The Summary of Economic Projections lists what each member of the FOMC expects for the next few years.

Expectations on:

• Economic growth.

• Unemployment rate.

• Inflation.

• Interest rates., inflation and interest rates.

This is one crucial insights & clues for the future.

So, what do we know so far, looking at above table?

(1) Core Inflation.

• SEP indicated the Federal Reserve sees core inflation peaking at 3.7% this year, lower than June's projection of 3.9% before cooling to 2.6 % next year and 2.3% in 2025.

(2) Unemployment.

• The Fed sees unemployment rate rising to 3.8% this year, below previous forecast of 4.1%.

• Unemployment is expected to [a] slightly tick higher to 4.1% next year and [b] remain at that level through 2025.

(3) Economic growth.

• The Fed sees stronger economic growth than initially projected.

• 2.1% in 2023, up from June's 1.0 % projection.

• Tick down slightly to 1.5% in 2024.

• Re-accelerating to 1.8% in 2025.

What I Think:

• The above projection may not stay put if Mr Biden lose his bid for a 2nd term.

• This is because with a new president, there is a 50% probability that a new Fed chairperson might be called to serve.

• The Republicans made no effort to hide their disdain for Mr Powell and the manner in which he has run his team of Fed governors.

• The joke / irony of all this is on 2, Nov 2017, it was Republican President Donald Trump that nominated Mr Powell to serve as the chairman of the Federal Reserve, replacing Ms Janet Yellen.

What To Invest & Divest: (my view & mine only)

Assuming a combination of “worse of economic time” & “best of opportunities” presides.

Invest:

• Technology. There will never be a better time to be innovative, especially during trying economic times. AI-related stocks — $Microsoft(MSFT)$, $Alphabet(GOOG)$ and Amazon(AMZN) should be the order of the day.

• Semiconductors. Stocks in this sector is tightly coupled with Technology stocks. $NVIDIA Corp(NVDA)$ , $ARM Holdings Ltd(ARM)$ , $Taiwan Semiconductor Manufacturing(TSM)$ .

Divest:

• Banking. With a weak but recovery-in-progress economy, IPOs and M&A (mergers and acquisitions) will be far, few and in between. Where will that leave Investment banks like [a] Goldman Sachs and [b] Morgan Stanley?

• Do you think US market has overreacted to Mr Powell’s press conference?

• Do you think the SEP is accurately depicting the US economy and the other elements eg. unemployment, interest rates etc…?

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