The Fed is waiting
Remember when markets were sanguine about the disruption and chaos in regard to the rapid introduction of the 2nd Trump era. The general rule is that markets function best with certainty. Disruption can create opportunity but chaos makes opportunity hard to find. The Wall Street Journal is mystified at the strategy with tariffs. The WSJ has repeatedly stated no one benefits from tariffs, especially when used against our closest trading partners. Especially after signing an agreement during his first term with Mexico and Canada that he is ignoring after saying it was the best trade deal ever. The results of tariffs were felt immediately by the stock and bond market but the impact on consumers in terms of cost have yet to appear. Today’s inflation numbers were in line with expectations by markets. Even so, the intraday and intraday volatility of markets, as expressed in the volatility index or VIX that soared this past Monday with record declines in averages including this week the SP500 briefly reaching correction stage defined as a decline of 10% from highs. The NASDAQ already pierced the level of correction. Markets are very sensitive to tariff announcements and every day we have seemingly impulsive announcements about the current state of tariffs.
The tariff wars are affecting consumer and business confidence. With a high level of uncertainty, confidence in general is declining in the month of February from the end of last year. The Atlanta Fed has an equation that forecasts the Gross Domestic Product for the future and the release of this figure that showed a decline in first quarter GDP of over 2% caused the discussion of a possible recession upcoming. Tonight the CEO of Blackrock, the largest money manager in the world, expressed fears of the economy slowing blaming the trade wars.
The bond market is also being impacted by rumbling in the economy. Analysts and economists have reduced their expectations for interest rate reductions by the Fed to maybe two times at the end of the year. Fed chairman Powell admitted that the Fed is waiting for more information about the impact of the change in policy we are witnessing. In the meantime, the yield curve is funky. From 1 month to 10 years, rates decline and then rise slightly. The bond market seems to be very concerned about slowing economic growth. The bond market seems less concerned with a potential rise in inflation. Stagflation talk began to bubble to the top at the same time the Atlanta Fed forward GDP growth turned negative. The bottom line is everyone is confused over the short term. The hope is that some clarity will emerge somehow although it is hard to see at the moment.
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