Discover and read the best of Twitter Threads about #FedPause
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Last week’s headline #GDP growth looked solid, yet the rate of #inflation continues to be remarkably tame, which helped to spark another move lower in U.S. Treasury yields. 
In fact, based on Friday’s quarterly data, we were not surprised to see core PCE #inflation move down to 1.55% for March, as per today’s data release.
Additionally, #consumer sentiment revised up a bit in April data from UMich, leaving it little changed from March. Longer-run #inflation expectations were unrevised at the series all-time low of 2.3%.
Though today’s #payroll report printed weaker than expected, we nevertheless think that the U.S. #economy is witnessing a transformation that is dramatic and persistent, and it is one that doesn’t fit neatly into the models drawn from previous experience.
In fact, the shift in focus from #manufacturing employment to service-sector #employment continues apace longer term, and at 3.4%, we’re beginning to see some decent earnings growth.
Has #FedPause become #FedStopped? The #Fed has rightly signaled a willingness to be patient to evaluate economic conditions since the slowdown in the global economy is real, and we’re still witnessing a draining of liquidity from central banks alongside it.
Importantly, the #FOMC agreed on an operating framework that requires abundant reserves, which essentially signals the #Fed is taking steps toward an earlier than previously expected end to balance sheet reduction.
Don’t confuse yesterday’s move for a simple Powell Put: since #volatility will continue to be present at the bottom of the capital stack, and while #equities could move a bit higher, they should move more with changes to top line revenue growth and margins/earnings.
When thinking through my “Nine Key Investment Themes of 2019” the first two relate to #policy factors and the state of reduced global #financial liquidity, which we think are some of the most important issues to get right early this year. bit.ly/2CSXKnz
We argue that a broader historical lens engenders a renewed appreciation for the #income component of total #return, which over long-periods of time is incredibly valuable and potentially is grossly underestimated today.
In 2019, investors also should be re-thinking their hedging toolkit, since our favored hedge from a year ago, the USD, no longer appears likely to play such an effective role in the face of #FedPause, but U.S. risk-free rates can now serve as a more effective hedge to risk again.
While we believe the #Fed should pause and keep the Funds Rate at current levels, they are likely to go ahead with their fourth hike of 2018 tomorrow. Either way, #Fedpause should be in effect for the foreseeable future, to allow the Fed to better judge stresses in the economy.
As a case in point, student loan #debt was barely a blip in the economy in prior cycles, but today it stands at near $1.5 trillion – this represents a new stress-point in the #economy that the Fed needs to appreciate. bloom.bg/2Ck4k7P
The NAHB housing market index was the lowest since May 2015; the lowest level of the entire #Fed hiking cycle. And housing is a key indicator of cyclical growth that drives wealth creation for a vast majority of households, so the Fed should be very sensitive to this #Fedpause
There were few surprises from today’s #inflation data, which came in unchanged on the month at the headline level, and 0.2% higher at Core, but more surprising in our view is all the handwringing we see regarding inflation by many #market observers.
Indeed, if we take a slightly broader view of the Fed’s mandate on #inflation; that which prevailed from the 1990s through 2012, of a target range of 1.5% to 2%, then the #Fed hasn’t been far off target for years now.
The rate #market has now effectively priced in a #Fedpause in 2019, as seen by the one-third probability of a hike in March. We are looking to the Fed for clarity around this point when they meet this month.
Much is made of the yield curve inversion as harbinger of recession – and it’s been true on occasion – but forward curves already indicated an inversion for much of the year: we think the curve shape has more to do with the #Fed trajectory, when they will pause, and UST supply.
Duration is becoming an effective #hedge again!
We think current rate market valuations look fair, with futures implying a December policy rate hike by the #Fed and an additional hike in 2019 (down from 2 hikes a month ago, and in line with a higher probability of a #Fedpause).
We would note that a December Fed policy rate hike would take the interest rate on excess reserves (IOER) close to the lower end of the #FOMC’s estimated median range for the “neutral” rate.
Yet, perhaps even more importantly, we think the #Fedpause is likely coming so the Committee has more time to observe the lagged effect of prior policy tightening, a consideration too many have dismissed.
Financial #markets continue to show signs of stress, suggesting the Fed is right to consider a #Fedpause, as we saw last week.
Since risk free rates are now nearer the neutral rate after a year of adjustment, duration has again become an effective #hedge for risky assets. While today’s moves were outsized, they come on the back of a flip in the YTD #correlation between risk free and risky yields in Nov.
2018 has been marked by the lowest stock-bond #correlation since 2013. We think that may change in 2019, as a data-dependent #Fed and now appropriately priced real rates cause correlations (and portfolio returns) to look more like 2014 than 2018.
