To The Moon

Let's start with the conclusion.

1. Compared to the December dot plot, we do not see any hint of the Fed turning dovish.

2. The banking crisis does not affect the Fed's tightening attitude.

As always, the Fed doesn't know what path it wants to take the U.S. economy down.

4. Ready to start hearing the "stagflation" narrative?

1. Don't see any signs of the Fed turning pivot (Pivot).

As expected, the Fed raised rates by one tick in March, raising the benchmark rate to a range of 4.75%-5.00%, in line with Street's expectations, and in line with the expected message, which is usually not too important.

Going into this FOMC meeting, I think the worst scenario "is definitely an immediate rate cut" because it means the Fed is likely to see more systemic problems than we see on the outside, which means there is more than one cockroach in the kitchen.

And here are 2 pieces of evidence going into the meeting that I thought Fed continued to raise rates, but "implied" a shift to dovishness, neither of which I saw.

(1) Compared to the December dot plot, this March dot plot has more FOMC members voting in the 5.00-5.25% terminal rate range.

(2) Instead of announcing a rate cut, the FOMC opted for a technical rate cut, such as lowering ONRRP usage and interest rates to force liquidity back into the banking system.

Let's start with (1):

The previous December dot plot supported a total of 10 members for the Fed's terminal rate of 5.00-5.25%, 5 members for 5.25-5.50%, 2 members for 5.50-5.75%, and 2 members for 4.75-5.00%.

The March PDT now supports the same 10 members for the Fed terminal rate of 5.00-5.25%, 3 for 5.25-5.50%, 3 for 5.50-5.75%, 1 for 5.75-6.00%, and 1 for 4.75-5.00%.

The damage is all comparative, if the March dot plot has more votes focused on the 5.00-5.25% with the last December terminal rate, then the consensus that the terminal rate will not be increased will be a very clear path.

Or if the dot plot becomes more dispersed and trending downward, then evidence of a shift to the doves can be found.

But this time, let's not talk about what happened to the 5.75-6.00% support, we can see that the Fed's dot plot this time can be said to have a very fragmented consensus on the Pivot, and even the overall hawkishness of the dot plot has simply moved up again.

Even if the Terminal rate does not change, but the hawkish attitude is more acute, which represents the current FOMC members hope to strive to remove the sticky inflation, do not appear too early to cut interest rates, and then need to return to the dilemma of raising interest rates.

Although the cycle of interest rate increases will indeed come to an end, but maintain high interest rates for a longer period of time (higher for longer) economic environment, is just about to begin.

In addition, I fully believe that with such a dot plot vote, there is no consensus that the FOMC will discuss a rate cut until the end of the year.

Further (2):

Here we simply want to see a technical rate cut adjustment that shows the "ambiguous" dovish ambiguity.

Theoretically, if the Fed wants to ease liquidity pressures in the U.S. banking sector, but wants to maintain interest rate hikes, it could use this technical adjustment to reduce ONRRP usage and interest rates to force liquidity back into the banking system, while maintaining the end-point interest rate target for the current cycle of rate hikes.

But the March meeting also did not see such a technical adjustment.

2. The banking crisis does not affect the Fed's tightening attitude.

The current liquidity indicators, such as the FRA-OIS spread and Ted spread, show that liquidity in the U.S. financial system is indeed tight, but I don't think there is much of a problem at this point.

According to the current thinking of the U.S. regulators, the banking crisis is to isolate the risk of a single bank, while other banks want liquidity, I also provide you with liquidity through extraordinary means, such as BTFP, at the same time, in the attitude of monetary policy, continue to maintain the posture of fighting inflation.

The Bank of England has already demonstrated the gesture of expanding and raising interest rates at the same time, and I think the Fed has a previous experience, so it should be more comfortable to use it now.

I understand that after the recent U.S. banking crisis, the market believes that the Fed will soon turn to lower interest rates in June and July because of the excessively tight financial environment, then more than one bank may fail.

I also fully agree that the current Yield Curve is seriously inverted and is putting heavy pressure on the banking industry.

But in the current U.S. labor market is still a tight issue, the Fed is really unlikely to easily turn to cut interest rates.

I didn't think the banking crisis would affect the Fed's tightening stance, and now it looks like the Fed is planning to beat back market expectations of a rate cut again.

As always, the Fed doesn't know what path it wants to take the US economy down.

Whether it is the dot plot or the Bauer press conference, they all continue to emphasize that they need to complete the task given by Congress to control price stability, that is, to anchor long-term inflation expectations at 2%, continuing the nonsense of the past year or so.

But in this string of nonsense, what the Fed did not say is:

The Phillips Curve has steepened significantly in the wake of the Covid-19 epidemic, but the structural imbalance between supply and demand in the labor market has made it difficult to change the slope, which has made it necessary for the Fed to exert more effort to move the Phillips Curve.

I know this is too academic. To put it simply, the Fed needs to keep interest rates high for a period of time, and as long as the unemployment rate does not go higher, there is no expectation of a rate cut because the Phillips Curve slope will not move until the unemployment rate goes higher.

In this period, the Fed can only continue to rely on the release of economic data to adjust the outlook for monetary policy, that is, data dependent, especially the non-farm employment report.

However, it should be noted that 87% of the total economic data is a lagging indicator for the stock market, and the other 13% is only a concurrent indicator (PMI is a concurrent indicator for the stock market and a leading indicator for the economy), and non-farm employment is one of the 87%.

There is no denying that the Fed has to drive with the rear view mirror of the non-farm payrolls report in order to verify that their monetary policy is really starting to move the Phillips Curve slope and to verify that they are starting to remove the stickiness of inflation, and believe me, they have no idea what path the U.S. economy might be heading down, and I suspect they are getting less and less so.

They can only be on the road, if they see the U.S. economy this car suddenly have problems, then where there are problems on the repair, such as banking problems, then provide short-term liquidity measures to save the emergency, not to save the poor.

But it is certain that this road to move the Phillips Curve slope flattening, remove the road of inflationary stickiness, the Fed will continue to drive on, at least for the time being it seems to be firm.

Soft landing door is narrower than December, Street will begin to appear stagnant inflationary thesis.

On the outlook for 2023, the March Summary Economic Projection (SEP) projects that

Real GDP is expected to grow 0.4% in 2023, down from 0.5% in December.

The unemployment rate is expected to grow by 4.5% in 2023, a downward revision from 4.6% in December.

Core PCE inflation rate 3.6% in 2023, revised up from 3.5% in December.

Simply put, the upward revision to core inflation, downward revision to the unemployment rate, and downward revision to GDP represent a tighter labor market than the Fed had originally anticipated, resulting in the Super Core PCE item supporting the sticky upward movement in the core inflation rate.

Therefore, in order to move the Phillips Curve slope to a flatter level, the Fed can only maintain high interest rates for a longer period of time (higher for longer) to further boost the unemployment rate, and during this period, the U.S. economy will inevitably grow at a lower-than-average level, so it makes sense to revise the real GDP estimate downward again.

In fact, I myself think that the Fed's 0.1 percentage point cut is probably too little, but if the cut is too much, it will also scare the market, so the Fed continues to give optimistic statements and does not want to eliminate the possibility of a soft landing, which I can understand.

As a stock market investor, after the banking crisis, and as mentioned above, the Fed's dot plot does not show any signs of a pivot (Pivot), I believe that the market's future views will shift back to: economic growth vs. inflationary stickiness in the pull.

Even the Fed's forecast for real GDP in 2023 is only 0.4%, and the actual growth path may be even lower, so I think we can wait for the "stagnant inflation" narrative to start appearing on Street in the not-too-distant future.

5. Conclusion: The turning point may have to wait a little longer.

As mentioned above, the Fed in removing the stickiness of service inflation on this road, not only is not yet changed, and even the March dot plot of the votes of the Committee even more hawkish, which means that the Fed has slowed down the current trend of inflation is not satisfied, because they want to once in place, by pulling up the unemployment rate to reduce the Super Core PCE, to complete this time to guide Phillips This means that the Fed is not satisfied with the current slowing trend in inflation because they want to do it all at once, by raising the unemployment rate to lower the Super Core PCE, completing the big project of leading the Phillips Curve to level off.

For the stock market, the current valuation of U.S. stocks I think is not cheap, I know many experts will go to buy the moment of high cost-benefit ratio, that is, to catch the EPS is about to have an upward revision cycle of the turn, because when the EPS is really revised upward, the valuation will appear convergence, and then buy, then the stock price will have gone up.

But the central question is, with the Fed unwilling to ease the austerity environment and the prospect of a rising unemployment rate, is the downward EPS revision cycle over? I am not sure, and under the pressure of high Fed interest rates, the room for valuation expansion is quite limited.

I have bought a few times this year, but tonight I liquidated most of my holdings that I bought since January right after the 02:00 chart was released, reducing my holdings to 8%, 30% bonds, and 62% cash deposits.

Indeed, if the U.S. economy is really in a good situation of "the unemployment rate is not going high, but the viscosity of inflation can relieve itself", then the Fed really has no reason to maintain high interest rates, interest rate cuts will not only happen, a soft landing will also occur at the same time, the U.S. economy will return to the Goldilocks economy (Goldilocks economy).

And if that happens, then I was wrong, and my performance will turn to underperforming the market, because the holding level is very low.

But I still think the same thing, this is the money I can't make, I try my best, and I think it's important to recognize my ability to make the kind of money that I can make on this trading path.

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