Yoyo Fed and Yoyo Markets

Once again, we have a report saying consumer sentiment is collapsing just as economists were projecting it would be continuing to float along, and once again we have a report of rising inflation, just as the Fed decided to reduce its fight against inflation by slowing down QT to save the federal government from its overwhelming debt financing burden, and once again we have an actual voting Fed official saying the Fed may have to raise rates. Yet, all of that has been OK apparently, since, once again, stock and bond markets have shot up in a buying frenzy because, once again, Fed Chair Jerome Powell filled them with his hot air so they would rise again on the hopes that rate cuts still might be coming this year.

So, the delusion in markets, continues intensely, causing investors to take back more of the financial tightening in the last three weeks that the Fed had finally put back into place, undoing, ONCE AGAIN, the premise Powell rested his hope of rate cuts on back in November, which was that the markets were doing enough tightening on their own that the Fed could stop its own inflation fight sooner. This is the second time he’s undone that tightening by markets; so, we’ll see more inflation and a worse inflation fight down the road because Powell has encouraged the markets to loosen financial conditions with his false hopes.

Consumers get what the Fed doesn’t

The University of Michigan Survey of Consumers sentiment index for May posted an initial reading of 67.4 for the month, down from 77.2 in April and well off the Dow Jones consensus call for 76.

Consumers, in other words, are not buying. Those are recessionary readings. Sentiment continues to fall away quickly, regardless of Powell’s and Biden’s hot air about the economy remaining fundamentally strong. Consumers also see the inflation that Powell prefers, for now, to think of as transitory (though he dare not ever use that word again). Instead, he now uses the word “bump,” indicating he hopes the rise of inflation all year is just one of those bumps in the road down to lower inflation rates that he had warned would come because, as even I’ve said, no path in economics is ever a straight line. However, the bump is getting a little long in the tooth now to where it’s looking more like an on-ramp. So, consumers, according to today’s report, now see inflation as rising to 3.5% by the end of the year, and they are seeing Powell as making the same mistake he did at the start of this whopping inflation cycle.

“While consumers had been reserving judgment for the past few months, they now perceive negative developments on a number of dimensions,” said Joanne Hsu, the survey’s director. “They expressed worries that inflation, unemployment and interest rates may all be moving in an unfavorable direction in the year ahead….”

“The magnitude of the slump in confidence is pretty big and it isn’t satisfactorily explained by” geopolitical factors or the mid-April stock market sell-off, wrote Paul Ashworth, chief North America economist at Capital Economics. “That leaves us wondering if we’re missing something more worrying going on with the consumer.”

Uh, yeah, you are! The rise in the price of black caviar probably does not bother Powell nor get the attention of Capital Economics as much as the rises in the prices of wheat, cocoa, and coffee bother the average consumer. Likewise, the seasonal adjustments on CPI don’t help the consumer who is paying more, even if because of the season, if not in spite of it. Other index factors that measure the strength of the economy in today’s report also saw declines. So, the consumer is seeing all this and wondering what the heck yoyo Powell is doing by talking markets tighter, then looser, then tighter, and then looser again. They’re starting to get air sick.

The Fed gets what the Fed doesn’t

Even one of Powell’s colleagues at the Fed is not so sure about his “bump” hopes:

Dallas Federal Reserve President Lorie Logan on Friday said it's not clear if monetary policy is tight enough to bring inflation down to the U.S. central bank's 2% goal, and with price pressures still too strong, it is too soon to be cutting interest rates….

"There are also important upside risks to inflation that are on my mind, and I think there's also uncertainties about how restrictive policy is and whether it's sufficiently restrictive to keep us on this path…."

"As I think about appropriate policy, I think it's just too early to think about cutting rates," Logan said on Friday.

The labor market and the broader economy remain strong, she said, an unusual combination in light of the rapid decline in inflation last year.

"But it's not a 'soft landing' until we've landed, and we haven't yet landed," Logan said, referring to a scenario in which inflation falls without triggering a painful recession or major job losses. She added that inflation data, particularly in the first quarter, "was a bit disappointing to us, and it's a good reminder of the work that we still have to do."

Without being alarmist, she was pretty clear that “job one” isn’t done.

So, what goes up on fantasy hopes of Jumping Jerome is a delusion, and heated delusions come down when cold reality continues to cool the hot air in their balloons.

The stock market struggled to gain much traction after data pointed to an economy that is slowing amid stubborn inflation, posing a challenge to the outlook of Federal Reserve rate cuts….

Umm. Mr. Powell, who said he doesn’t see either the “stag” or “flation” of stagflation so far, that is exactly what that data you keep saying you are dependent on is showing you—a slowing economy with rising inflation. So, congratulations, you’re there.

Equities wavered and bond yields rose following a report that showed US consumer sentiment declined to a six-month low as short-term inflation expectations picked up….

Jeff Roach at LPL Financial. “Although it’s not our base case, we do see rising risks of ‘stagflation’ — a concern markets will have to deal with….”

Zaccarelli also noted that if spending slows down and inflation increases, “we’ll get the opposite of the Goldilocks scenario that many were hoping for, and the Fed will be in an especially difficult position of choosing between accommodating a slowing economy and fighting increasing inflation expectations….”

“This sure feels much more like a 1.5% type economy rather than the 3%ish that some think we’re still in.”

Yes, it does … and going lower … as prices continue higher.