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Have You Ever Been 100% Certain of an Expected Outcome?

CAMS Weekly View from the Corner – Week ending 1/27/2023

January 30, 2023

And if so, how did it end up working out for you – did your certainty manifest accurately? That is more of a life oriented question in its generality and yet if you have enough life under your belt you may smile with the question alone. The point being life is consistently inconsistent as the timeline always seems to offer its twists and turns thereby turning our certain expectations into unexpected downstream experiences. Per our previous edition we shared how there is a big Federal Reserve meeting coming soon. This week Wednesday Chairman Powell will report the conclusions of the Federal Open Market Committee (FOMC) which is the body within the Fed that sets interest rate policy. The anticipated meeting invites a wealth of questions being it has been since mid-December that we have heard from the FOMC and their general stance on policy. Will Powell and friends continue to be steadfast on the price inflation fight generally? Will they remain laser focused on sub-areas within the price inflation backdrop? As a large sub-component of the price inflation backdrop they have been relentless on the topic of Services inflation. As we shared in our previous edition the most recent release of the Consumer Price Index – sub component Services had set a new high year-over-year percentage growth rate reflecting no let up in trend. There are other price inflation measures that chime in on the stickiness of trend. The general narrative in econ land if you will is that price inflation has peaked and is coming down and will continue to come down in light of the expected coming recession. Does the Fed share this view? Just seven weeks ago in the post-FOMC press conference Chairman Powell was relentlessly steadfast on price inflation generally and Services price inflation specifically in light of its unrelenting trend. As shared, relative to Services the trend has not changed but also as shared the narrative on price inflation generally has continued to become more sanguine. Will Powell and friends remain where they have been or are they going to inform us they are changing to the general narrative without perhaps saying so explicitly? There are many questions indeed heading into this week’s Fed meeting. Collective Market Participants Know with Certainty the Fed’s Next Move Market participants collectively seem to have zero doubt as to what Powell and friends views will be this Wednesday. Via the 30-Day Fed Funds futures pricing data they are 100% certain (98% to be precise) that the FOMC will raise their benchmark Fed Funds Rate by ¼% and with this displaying their ramping down of interest increases to reflect the price inflation battle is a lesser concern than the imminent (expected) incoming recession. Importantly, to date Powell has not iterated the above general view but said participants believe he will be coming along soon – perhaps as soon as Wednesday.

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The above graph reflects the CME Fed Watch Tool.  This tool reflects a 98% probability that the Fed will raise their Fed Funds Rate Target range to 4 ½% – 4 ¾% at the upcoming meeting which will reflect a ¼% interest rate increase. The above tool’s 98% probability is distilled down from interest rate traders (think collective market participants) as implied by the 30-Day Fed Funds futures pricing data.  Bottom line, they are certain as certain can be the Fed only raises by ¼% this Wednesday which will also mark the beginning walk away from Fed rate hikes. A Tremendous Curiosity The most curious aspect of the above general storyline is what if Powell and friends are not in sync at all with the collective participant/general narrative views? What if they remain focused on the fact that Services, as one example, has not let up in trend and with this feel they have much more work to do on the price inflation fighting front?  If this is the case will they choose to raise by ½% as they did in their previous meeting sending a clear message that the current narrative is far too sanguine and needs to be reigned in to match the severity of the price inflation issue. If the above were to unfold do collective participants recoil via re-pricing risk assets – think stocks etc going lower – or would they remain convinced that the Fed will be seeing it differently soon in light of that seemingly imminent recession that hasn’t arrived yet? Conversely, if the Fed does follow through as expected and only raises by ¼% will participants look at this as full confirmation they have it right and in-turn send risk asset prices upward from here in a celebratory sense that the rate hikes are done? There are various scenarios with lots of questions surrounding each.  Bottom line, this coming Fed meeting is an important one and there will be many subtleties strewn within the conclusions of the FOMC.  I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis


H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP). This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”. A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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