To The Moon

Powell is never too bold.

Feds Dec Minutes released (Click to view minutes of the meeting). In summary, Feds

Is willing to slow the pace of tightening, but still focused on inflation, so the interest rate increasing remains.

According to the Bloomberg Fed Minutes Sentiment Indicator, it is the most hawkish minutes since May.

However, the market is not scared, even nort regarded as a "hawkish" report. It only fluctuated by 0.5% intra-day, and it should be closed up.

Why US stock market so optimistic?

First, the "hawkish" expectation has been digested in the previous day. On January 3rd, the first trading day of the New Year, all three major stock indexes closed down, among which Nasdaq, which has a high weight of technology shares, fell the most. Funds from sectors with high market risk appetite have flowed out to a certain extent.

Second, the market had previously priced-in recession expectations and expecting the Fed reverse its tightening policy.The market believes that if the Fed continues to tighten, the inflation they are concerned about will plummet in a "recessionary" way (the US debt market bet last month that the overall inflation increase in the United States will drop sharply by more than 5% in 2023), so the Fed will have to change its policy in 2023.

The Fed's performance in this inflation cycle is also very cautious, which lags behind the market.

1. In 2021, when inflation began to rise, the Fed firmly believed that inflation was temporary, and it was not until it reached a 40-year high that it began to "catch up" with interest rate increasing;
2. In the second half of 2022, when commodities prices began to fall, the market believed that inflation peaked, while the Fed still raised interest rates sharply, which restricted industries closely related to interest rates;

The reason why the Fed is "unresponsive",because of its caution. They are data principle, we should see the relevant data proof before making corresponding actions, instead of predicting in advance. Therefore, there is always poor rhythm. Meeting minutes show that

Participants stressed that the Committee's ongoing monetary policy tightening to achieve a stance that will be sufficiently restrictive to return inflation to 2 percent is essential for ensuring that longer-term expectations remain well anchored.

At the same time, in the fiscal policy game of the US government, the Federal Reserve is unwilling to be a maverick and become a "back pot man" in a special period. Now that the government is becoming more and more divided, the Fed should be more careful in every step of its actions.

Therefore, the Fed's tone is to maintain a tightening policy as long as it does not see the inflation data fall to the target point, regardless of whether it will fall in a "recession" later. The implication is, It is the Fed that does not think inflation will fall sharply in 2023.

The divergence between the market and the Fed is the pace of inflation declining.

At present, the hawks of the Federal Reserve does not want the market to be optimistic in advance, although everyone's goal is actually the same: to control inflation, avoid economic recession and achieve a soft landing.

The reason why the Fed is more cautious is that it is worried about the runaway inflation in the 1970s. It would rather keep the tightening policy for a long time and affect the economic growth rate, rather than let inflation revive.

At the current level, there are two reasons why the market thinks that inflation has a high probability of falling as scheduled or even falling in a "recession":

1. wages.

An important factor determining the rate of inflation decline is the level of wage growth. Wage growth is a major variable at present, which is related to employment situation.

Year-on-year growth rate of Avg hourly wages in the

Although we have seen companies in many industries start to lay off employees in 2022, However, according to recent employment reports, there is a shortage of labor supply in the United States after the pandemic, especially the gap between labor supply and demand is still unbalanced. At present, the labor gap is about 3.5 million, which means that even if there are more unemployed people, they can still find the next job. It's just that different jobs and labor forces may be mismatched to a certain extent.

Only when the gap between supply and demand of labor is further filled can the rising wage level be stopped and inflation fall back to normal level.

2. Savings

Another basic factor of inflation is people's savings level. As the savings level of American residents has further declined, it is even lower than the level in 2018. The United States is a consumer-oriented country, and residents' spending power can largely determine economic vitality.

The personal savings rate in the United States is declining

Can't the Fed see the above data?Of course not, it's just that the Fed can't make bold expectations in advance in judging the fall of inflation.It's a big deal that the plan can't keep up with the changes. If inflation drops sharply in the second half of 2023, it's not too late to revise the policy.

However, investors in the market can naturally gamble in advance.Because they are also consumers themselves, they can put themselves in the changes of the surrounding environment. Therefore, they naturally believe that the current hawkish attitude of the Fed is just prevention in advance, and it will return to a soft landing.

As long as there is such expectation, investors' risk appetite will naturally return.

The same is true of the main line of investment in 2023.

• From macro, the market finds a balance between risk-on and Fed's attitudes, the market may go back and forth many times.
• From enterprises, most companies are facing a decline in growth rate, cutting costs and increasing operational efficiency, which is also a way to actively seek change through the recession.

For investors, it is more important to grasp the main line, and it is also extremely important to follow the flow of funds. Even if the interest rate hike has not stopped, the weakening of the US dollar is a consensus. Some money has started to flow out to other assets, such as the safe-haven Japanese yen and Chinese assets.

Market always know where to put money.