There is something I've been thinking about all holiday-weekend long. Is the Fed's tightening already enough to send us headlong into recession (I've argued yes)...or do we actually need a whole lot more tightening to get us to that outcome? And is that what the yield curve has been telling us.
While we've already had the sharpest, fastest tightening cycle in history, some would argue rates should be double where they are right now. I've seen a few different "Taylor rule" formulations lately suggesting rates actually need to be at 9-10%, not the 4.6ish percent we are at right now.
If that makes you choke, or laugh, or roll your eyes (or want to sell everything), a somewhat less aggressive formulation is to simply compare the Fed funds rate with consumers' expected one-year inflation rate. But it still points towards the same conclusion! "Restrictive" policy means the Fed's rate is well above expected inflation, which just rose to 4.2% in the latest Michigan survey. As you can see, we are barely above that, and certainly not at levels the Fed itself has historically considered "restrictive," meaning, in other words, policy may still be too loose right now.
"If anything, the risk is that policymakers start to highlight the risk of an even higher terminal rate," wrote Aneta Markowska of Jefferies a couple weeks ago. And sure enough, as our Steve Liesman keeps pointing out, the market is finally pricing in the level Fed officials have said they want to take rates to (above 5%). In fact, just this morning, December futures for the Fed funds rate have hit a new all-time high of 5.15%, and "for the first time," Steve reports, "we are trading above the average Fed forecast for year-end of 5.13%."
This all appears to derive from the strong January economic reports we've been getting in recent weeks, since the last Fed meeting. The 10-year yield this morning is at fresh year-to-date highs, just shy of 3.93%.
Why the stock market is largely shrugging this off remains a mystery to me, although maybe we're seeing some catch-up today. The Dow is down almost 500 points as of this writing, and that's not just because of Home Depot's post-earnings weakness; its percentage drop is virtually the same as the S&P 500's 1.4% decline.
Another leg down in the market is pretty much the only way I can make sense of this whole landscape. That said, it's not the market's job to conform to what I think is happening in the world, obviously. And as a very wise, very successful investor warned me over the weekend, its recent rally should not be taken lightly:
"After 50 years of investing, I still believe the stock market is the best economic forecaster," he told me in an email. Which makes the next few weeks of market behavior--to either confirm or reverse the year-to-date trend--all the more crucial.
Natural gas looks like it's about to go sub-$2 per million BTUs. We got almost down to that level this morning. We were at nearly $10 last summer! The price has fallen by nearly 50% just since January 1st!
(a) relief is HOPEFULLY coming for people like Californians absolutely smothered by shockingly high winter heating bills;
(b) energy bears like Ed Morse continue to look smarter and smarter as it appears the pandemic shortages have now turned into production gluts;
(c) inflation expectations (and headline readings) should start to recede, though it might take several months; and
(d) energy stocks have held up surprisingly well amid all of this. Shares of one leading U.S. natural gas producer, EOG, are only down about 8% this year and 20% from their all-time highs.
ON THE SHOW
Norfolk Southern's CEO has done a CNBC interview that will fully roll out in the new Closing Bell 4pm show today. We'll have a soundbite and reaction from a crisis management expert on this disaster in Power Lunch, around 2:30pm ET.
I've also been collecting your market questions on Twitter, which I'll put to our guests all week long. Please keep them coming!
I think we lucked out on the school-vacation front this week. It helps to have kids who are still too young to even know or want to visit something like Disney World, but the boys are down in Washington, D.C., having the time of their life running around the monuments and hitting up the museums. Meanwhile at home--even with a baby and a very wild two-year-old!--it's eerily chill.