Friday’s reversal calls into question the desirability of a Fed pause.
Follow my thinking on this one: The same people who have been begging, wheedling, whining for the Fed to s top have now realized what it was they actually wished for: An official Fed acknowledgement that the economy has slowed — dramatically.
It turns out that’s not a good thing. As the economy slows, expect revenues to soften, and profits to get hurt.
I find it hard to imagine that is good for equities. The weakness in the Trannies today was an early clue that the economy is softening. The bond market seems to agree, with the 10 year down to 4.9%.
At this point, perhaps the market would be better off with a single final rate hike — thus reassuring all interested parties the Fed still has faith the economy is just fine. The accompanying Fed statement would then imply that they are done, and that markets can expect a pause in September.
This would be far more desirable than the Pause/Resume scenario we laid out in April.
Of course, all that does is delay the inevitable. My views remain the same: The economy is now slowing, and inflation is not only present, but very possibly accellerating. Doug Kass calls it the "Sour Spot" — the exact opposite of the goldilocks sweet spot.
The only question is for how long and far can investors rationalize this, and maintain a long bias.
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