The Fed's Credibility | Morning Express | 2/1/2023

Posted: Feb. 1, 2023, 8:37 a.m.

Fundamentals: The Fed’s credibility. I am sure you have heard many, including us, talk about the Federal Reserve trying to save its credibility and why this will drive policy. Where does its credibility lie as the clock ticks down to today’s decision at 1:00 pm CT? To poke at this, we must ask why the Fed’s credibility is in question. Simply, the committee has been an awful forecaster and has a history of being painfully behind the curve. Most recently, at a crucial juncture in 2021, the Fed kept policy loose, turning a blind eye to rising inflation in favor of high unemployment. Make no mistake, the committee’s job is not easy, but its patience at that time forced it to become historically aggressive last year in order to tame mounting prices. There are now signs the rise of inflation has cooled, and Q4 wages (ECI), an indicator of inflation, further confirmed this yesterday. At the turn of the year, we looked to deteriorating economic conditions as a reason for the Fed to slow the pace of hikes and even consider pausing. Although there are pockets of the economy in recession, as January unfolded and after further consideration, we see an equal number of pockets thriving. First off, we believe the consumer to be strong. Although credit usage is mounting, it is being sacrificed for instant satisfaction, and we expect strong January Retail Sales. Second, housing is the most lagging component of inflation, and there are signs it is bottoming. Yesterday’s House Price Index data showed less of a drop in prices than anticipated for the third month in a row, through November. Furthermore, Redfin’s CEO has spoken of drastically improving conditions in January versus November and a whiplash effect building, finding tailwinds from a lack of inventory. Lastly, and maybe most importantly, froth is percolating back into the market. Although the S&P and NQ have merely rebounded to levels in December, the internals of the market have been driven by a large increase in speculation. Market froth alone will not drive monetary policy and is unlikely a top five, however, the three points holistically, among others, factor into the ebbs and flows of inflation. Though inflation is cooling, a failure by the Fed to strangle it paves the way for it to be revived. In fact, we are seeing that now. The Cleveland Fed’s Inflation Nowcast forecasts January headline CPI to rise +0.63% m/m and Core at +0.46% m/m, the sharpest jump in seven and four months, respectively.

Early in January, we noted the Fed could and should pivot but cannot pivot until the exact moment they are ready. For this reason, and those noted above, that moment has not arrived. The committee will hike 25bps because they backed themselves into that corner, and anything other could reduce their credibility. However, we believe Fed Chair Powell and the committee must remain steadfastly hawkish, and we are likely to hear Powell channel his messaging from Jackson Hole in his press conference that begins at 1:30 pm CT.

Earnings this morning were mixed. TMO beat expectations and traded higher by 2%, whereas TMUS topped EPS but missed on revenues and is about flat. However, it will be Meta Platforms after grabbing all the headlines on this front after the bell. Tomorrow, after the bell, the trio of Apple, Alphabet, and Amazon are due.

Technicals: Price action has been reflexive to data and responsive to support. There is a clear underlying buoyancy, and yesterday’s rebound is testing into the top-end of not only the recent range but the peak December tape. January closed out with a rip into the final minutes, and the overnight held up well, this establishes strong major three-star support at 4062.50-4063.25, and a break below there will help neutralize yesterday’s late activity. Similarly, we have first key support in the NQ at 12,072-12,089. Volatility will be the name of the game today. To the upside, it is of course resistance aligning with last Friday’s high in the S&P at 4106.25-4109.25 and in the NQ at 12,252-12,309. However, the downside has been more perplexing, and though it is not the bottom-end of the recent range, our most critical major three-star support comes in at 4030-4035 in the S&P; a close below there could encourage added liquidation.

E-mini S&P (March) / NQ (March)

S&P, yesterday’s close: Settled at 4090.00, up 57.50

NQ, yesterday’s close: Settled at 12,152.00, up 184.00

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