Marc Chandler – The Fed Has Gone From Behind The Curve On Inflation, To Behind The Curve On Recession

Marc Chandler, Managing Partner at Bannockburn Global ForEx and Editor of the Marc To Market website, joins us for a detailed review of market expectations and reactions to the FOMC meeting earlier this week and the ongoing concerns about the banking sector, both in the US and in Europe.

 

We start off with some of Marc’s main takeaways from Jerome Powell’s press conference, after the Fed hiked the anticipated 25 basis points to continue fighting stickier and higher inflation, yet in the face of continued investor outflows from the financial sector.  The US Invesco KBW Regional Banking ETF (KBWR) was down over 30% in just the last 7 weeks, and European AT1 ETFs are down 21% in 7 weeks in a row, and down 8.5% on just this Friday. We note the market expectations between trends in the breakevens for inflation and in the expectations transitioning to a “Powell Pause” and now multiple rate cuts projected in the 2^nd half of this year.  Marc outlines that the gap has never been so wide between what the market is anticipating and what the Fed is forecasting, and feels both sides have slightly exaggerated expectations.  We discuss that the Fed has gone from behind the curve on inflation, to now behind the curve on the developing recession.

 

Next we discuss some thoughts on to the Fed’s balance sheet expansion over the last few weeks, and whether this is wiping out the reduction in their balance sheet from their ongoing pledge for quantitative tightening. Marc distinguishes that the increase in their balance sheet is not due to the quantitative easing, and is more a liquidity loan to shore up banks and their depositors for the short-term, but the market still sees the expanding balance sheet as inflationary, while the financial woes and falling interest rates and bank lending will be deflationary. We wrap up discussing the flight to safe have assets like bonds, the Japanese Yen, and gold over the last few weeks, but not really the US Dollar, and Marc has some nuanced thoughts on each sector.

 

Click here to visit Marc’s website – Marc To Market.