Thread by @fundstrat

While Fed chair #Powell was "hawkish" in FOMC presser, his statements revealed key factors to "dovish" path

- labor “I don’t see the case for real softening just yet.”
- inflation “we haven’t seen inflation coming down.”
- housing “still some significant increases coming”

1/10

Labor statement below:
- Powell says no sign softening
- yet today's jobs report shows unemployment rate rose +0.2% to 3.7%
- that is a sign of softening

2/10

Inflation, Powell says haven't "seen inflation coming down"
- yet prevalent and widespread signs of price increases cooling
- see prior thread

https://twitter.com/fundstrat/status/1583568070127235072?s=20&t=KA8vVXUH2W8yI0cgqZZkNA

3/10

Housing, Powell acknowledges gap between "real-time rent" and how captured in #CPI

- "considering that we also know that at some point you'll see rents coming down"
- rents are falling and @ApartmentList shows most clearly
- even if CPI lags

4/10

https://twitter.com/chris_salviati/status/1587146202415439872?s=20&t=KA8vVXUH2W8yI0cgqZZkNA

So he makes clear what #Fed would like to see before considering a pause, and he explains assymetry in fighting inflation "too little" exceeds risk of "too much"

- basically, tools exist to reverse "too much"

5/10

But inflation is less of a "black hole of pain" compared to 1980s

- we are 18 months into high inflation compared to 1980, when #Volcker was handed 15-years of cumulative "high inflation"

- see our prior thread -->

https://twitter.com/fundstrat/status/1575208165347672073?s=20&t=KA8vVXUH2W8yI0cgqZZkNA

6/10

Markets are so PTSD around Volcker and hyperinflation, this has also rattled Fed

- Powell flinched when reporter said stocks "reacting positively" as if this inflicted pain

7/10

But Fed has already won, S&P 500 at 3,800 is down 25% in inflation-adjusted terms

- even a recovery to 4,800 is down 8% in real terms
- real return is what would contribute to inflation via wealth channel

8/10

Stocks are acting like a "beach ball under water" because P/E is the highest when 10-year interest rates are between 3.5% to 5.5%

- look at P/E vs 10-yr since 1930
- all tightening cycles also shown as colored plots
- P/E tightening/non-tightening highest 3.5%-5.5% 10-yr

9/10

Meaning, take a look at the big picture:

- Fed stepping down pace hikes to 25/50bp
- more predictable
- equity markets can "deal with predictable"
- economy been resilient

KEY
- incoming inflation needs to cool (soon)
- then Fed stops "flinching" as markets calm down

10/10