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Chaim Siegel of Elazar Advisors joins Senior Executive Editor Kim Khan for a breakdown of Wednesday’s Fed decision. What the hawkish pause means for the equity rally, why the market is skeptical about Jay Powell’s rate cut pronouncement and how jobless claims remain crucial.
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Transcript
Kim Khan: Welcome to the Special Fed Edition of Seeking Alpha’s Wall Street Breakfast Podcast. I’m your host, Kim Khan. With me is Chaim Siegel. He’s the Investing Group Leader of Fed Trader on Seeking Alpha and Founder of Elazar Advisors. Thanks for joining us.
Chaim Siegel: Great. Great to be here. Thank you, Kim.
KK: So, let’s just look by the numbers at the Fed decision today. No move as expected. Still 5% and 5.25% range. In the dot plot, there were two hikes penciled in through year-end. Going up to 5.6% from 5.1% Also, in the dots, they had higher GDP, lower unemployment, and higher inflation, a lot to unpack there. So what’s your initial thoughts?
CS: I said to subscribers that there’s what Powell needs to do and what he’s probably going to do. What he needs to do is be much more aggressive, but what he’s probably going to do is not be so aggressive. And two, measly hikes in an environment where core inflation is staying very high and stubborn and inflation expectations are rising, and they’re ignoring that, something they’re focused on for decades.
They’re going very easy on inflation, which is bullish. If they let inflation run, which I think this move today is letting inflation run, then it’s a bullish story for the market because inflation is prices and the stock market is prices, and prices go up.
KK: So you would have liked to see even a move today, you think?
CS: No, no. I’m not telling the Fed what to do. I’m just telling them if they want to reduce inflation, today’s move and today’s guidance did not scare inflation lower. If they want to reduce inflation, they need to be more aggressive. They need to raise rates more. I’m not looking to tell the Fed what to do. I’m looking to help subscribers react to what the Fed is doing, so we can understand what the market’s doing. And hopefully, with the hit ratio predict what the market’s going to do, we’ve been bullish all year. We were bearish last year and the market went down. We were bullish coming into this year and the market’s going up. And bullishness for this year is basically because the Fed is letting inflation run. They’re not stamping out inflation.
I think what bears have been worried about is the Fed is going to be super aggressive and which is going to kill the economy, which is going to kill the stock market, and they are not doing that. I mean, we’ve had a series of 6 months in a row of 0.4 core CPI, and they’re doing nothing about it. And five-year inflation expectations are starting to skip a little higher, and we’ve heard, you can hear them say the quote in their voices. Inflation expectations are “well anchored.”
I mean, everybody who’s listening to me, now that follows the Fed, knows that term, but wait a minute, the inflation expectations – five-year inflation expectations, the Michigan survey has issued the last couple of periods has been skipping higher and CPI is staying higher. I mean, that’s something they should be worried about and they’re not. Why? Because the last time Powell threatened to do a 50 basis point hike. He had a bunch of bank failures based on even just hinting at 50 basis point hikes because they’ve been — they haven’t been watched, like the bank overseers did not keep tabs on the banks and their balance sheets, and the banks are not in a strong position.
And if he gets aggressive, he’s going to fail or cause a lot of banks to fail, and he doesn’t want that. What he should do is let banks fail, and so that’ll slow the economy. And he’ll get inflation under control and — but he’s not doing that. And so that’s a bullish story for the market, I believe.
KK: Okay. For our listeners, we’re recording this just after Powell’s press conference at around 3:35 Eastern Time. And the market is looking like they don’t particularly know what to make of the story at present. They’re mixed on, S&P is probably around the unchanged line. NASDAQ is up a little bit. We’re going to discount the Dow because it’s getting a big point drag from UnitedHealth.
On the – in the bond market, we’ve got yields moving. Down a bit on the longer end of the 10-year, I’m down a couple of basis points, but up to about 6 basis points of the two-year. So another one of these kind of push and pull Powell press conferences. Although I did catch an interesting thing where he was talking about what’s coming up and he used the — specifically termed that the July meeting is going to be live, which sounds interesting, which means they aren’t kind of dead settle, the market is pricing in a 70% chance now that they will hike at the next meeting. But at some point, he did kind of have a little what I thought was a big tell. He said, he called the July meeting — he called the current meeting a skip, which just suggests that…
CS: Right.
KK: …they’re ready. And then he said…
CS: No. He said I didn’t say skip. No, no, no, I didn’t say skip, skip, skip. I didn’t say skip. Skip that, I said skip, skip.
KK: So we feel like we know what the Chairman is thinking as of – and he didn’t…
CS: No, he was clear. He was clear that the committee and he is – are guiding to one hike and two hikes that to use your term penciled in, which I think is the right term because they change all the time and he admits and the Fed has become much more humble now, which I like. But the last year or so, they were not humble. They thought everything they expected was correct, but they’ve become much more humble now. And they said, we don’t know what’s going to happen, so don’t listen to us, and that’s the way they should run. That’s where the Feds run.
And so I do – Fed, that the next meeting is live is a standard term that they use. And it means that, they’re hoping that CPI or core CPI comes down, but if not, they plan to hike. And – but he also said that, they’re 5.6% Fed target, and it kind of changed on that. Historically, he says it’s just a dot plot. It’s a median estimate of all of our thinking. But this time, he said that they were much more unified, so – but he also said that that’s more the target.
And so he thinks they’re significantly restrictive or restrictive, which I think is wrong, and he was challenged on that by a reporter, which I thought was correct. I mean, inflation is running 5%, and the Fed funds are 5%. That’s not significantly restrictive. But if they hope to get inflation down to 3%, then 5% is significantly restrictive.
So they – what he says and what he’s doing are two completely different things. I’d call him a wordsmith. He’s amazing at talking, but he’s not doing everything he’s claiming he’s doing. He’s letting inflation run right now based on his actions. And I just want to comment on how you open this question with the market. I mean, we’re making calls on the market and the biggest stocks in the market every single day. And one thing I look at is, I have a proprietary measure on the S&P and the queues and stocks.
If the market’s overbought or oversold, and right now, queues look very healthy, but the SPY’s have been overbought for a couple – a few days. And so that the market is flat and the rate and the Fed guided to more rate hikes. In a backdrop that this, I consider the SPY is overbought is a very bullish, a healthy action sign. Action means to me, it’s a — I don’t know if I made it up, but I think it’s more of a trader definition. How – what you would expect the market to do based on news versus what it does, and that’s a big tell of what the market wants to do.
So the fact that the market’s overbought and you had quote, bad news with, oh, we expect more rate hikes, but the market’s kind of not budging. It just means that, we’re still in a bull market. This is very healthy. I would say that there is one thing I am worried about is the jobless claims. Last week it spiked. And all year, I’ve been — when bears were worried about recession, I was just focused on that jobless claims number saying, it’s been very strong. GDP is holding up. So I’m not sure what the bears are worried about.
And as long as the economy is holding up, and that’s what he guided to, and maybe he had as a peak — sneak peek at what the jobless claims report is going to be tomorrow, is my guess that maybe it came down from that spike, meaning it’s a healthier economy versus last week – week’s report, and it’s a volatile series, but it’s important to me.
And overall, and he also said that, rents are lagged. He said it’s one-half of PCE, which is a huge number and they’re lagged. So he’s considering that. He’s also — and he said that there’s lag effects on the Fed policy and monetary action. So they’re really much more on hold and they’re where they want to be. They are not being aggressive, and that’s a bullish message to the market. So I mean, my takeaway is much more bullish than most people out there.
KK: Well, I would tend to agree on the stock market point of view, in as much as like, yes, there’s been little reaction to what everybody was calling a really hawkish pause. And so if the market is holding up, especially given that just already going into today’s trading, the QQQs are up about 2.5% and SPY was up about 1.5% just on two days trading. That’s pretty strong. Another bullish sign we saw a bit. I mean, it’s too early to tell probably, but the equal weighted S&P did as well as the – the RSP did as well as the SPY, going into this week, seeing that there’s a bit of catch up in this story about the narrowness of the market is maybe…
CS: Oh, good.
KK: …tilting a little bit. On jobless claims, also, yes, maybe we’ll definitely see tomorrow, maybe he did get a peek, but there’s been a lot of distortion, too, especially given the fraudulent claims in Massachusetts, so that could be something that maybe is – it was more of a one-off number and…
CS: Oh, that’s a good point.
KK: …and they could be holding up as well.
CS: That’s a good point.
KK: In his press conference, Powell did say that he kind of – he saw the labor — a stronger, more resilient labor market now as actually beneficial for a soft landing rather than something that he had to….
CS: Right.
KK: …he wanted to fight. I wanted to get your thoughts on that?
CS: Right. I agree. I mean, that’s what he said. That was a very bullish message. Following the Fed for a long time, I see the market reacting a lot to what whoever is speaking, so whoever is the Fed head speaking at the press conference, what they say about the current market situation. So if they – it’s – and I see the market reacting almost simultaneously to those comments almost always.
So when the Fed Chairman, whoever it is or woman says that the economy is staying strong. The market loves that. And when they say, the market is weak or getting weaker, the market hates that and really feeds off of that messaging. And I think you’re spot on to say that he feels good about the economy. And I think that’s why he sounded pretty confident today that they’re kind of where they need to be. He didn’t sound nervous. He didn’t – he was able to express himself correctly, which not every meeting — he doesn’t do that in every meeting, express himself clearly.
Sometimes he’s – feels that and he’ll have to just read off of his scripts – his scripted answers. But today, he was more loose and comfortable that he’s there. And I think the bank weakness gives him comfort, and he doesn’t want to force that. And I think the rents, the lagged effect of rents in the data gives him comfort.
So while I’m – I sound tough that, he’s not doing what he needs to do. He has what he needs to say that he doesn’t need to be aggressive now. And so the market, when this SPY, as I call it, SPY overboard washes away if it stays flat or goes down over the next few days, then I’d consider the overbought to be gone, and there would be a much better short-term risk reward.
But overall, I’m – I’ve been bullish for the market. I kind of got a little worried ahead of this meeting for the dot-plot because it sounds like the dot-plot was going to move up ahead of this meeting and it did. So I said to subscribers, I said the dot-plot is going to be bad, but the Fed’s – but Powell is not going to sound as bad. He’s going to sound more bullish than dot-plot. And that’s kind of the trajectory of what happened today with the market. The market got hit on the dot-plot and came back with the press conference.
So I think as much as the dot-plot is the group thinking, the market’s smart to know that Fed is just a very overpowerful leader in the group, and they all follow him. So whatever he says is really the story.
KK: Precisely. And Powell did point out that the dot-plot is just kind of back to an area where it was before the SVB crisis?
CS: Yes, that was very nice. Yes, that was a bullish comment.
KK: Yes. I want to get to one last thing on certainly where the markets and Powell seem to disagree and he’s – he put stuck this in kind of close to the end of the Q&A when he said, we’re talking about a couple of years out for rate cuts. And that’s something that’s certainly not priced in, still looking at the latest Fed funds futures. They’re looking at rates being lower starting in January of 2024. Do you think that a couple of years is realistic? Or is this just a kind of way to kind of give a hawkish tilt to what was pretty much a devilish kind of press conference?
CS: I’m not – if you’re asking me what he’s thinking, I think he also knows that his expectations are meaningless. And all of Fed Chairmans have expressed that their expectations are meaningless and usually wrong. And I think the Fed of the past, this Fed does not respect the CME. The Fed funds futures as much as previous Fed administrations have respected it.
And I think this Fed administration needs to respect it much more because when I tell subscribers all the time, the market’s smarter than all of us, and technicals and action are an important messaging factor for us to understand where the economy is going. And many times, the market is looking bullish and everybody worried about bearish or economic – bearish economic numbers. It can be a case of the tail wagging the dog as much as the mark and the Fed’s main tool as they’ve admitted over the last 20, 30 years that I’ve been following them is that their main tool is not that they have rate changes to rate that they change rates.
Their main tool is affecting the stock market because change in rates affects the discounting mechanism of future cash flows. And so that affects the stock market and the stock market affects sentiment of the economy, so it’s very much tail wagging the dog. And so as much as the market is staying up, it’s telling you that there’s good news ahead. There’s no – I don’t see negative technicals. I don’t see negative action. Slow action is bullish.
So look, I’m sure that I haven’t – we’ll see where the CME ends up, and I’m sure it’s going to follow to go move up and maybe expect one hike and then no cut before today, it was one hike and one cut. I tend to think that the CME is correct. And so we’ll see. But I would also say that, the core CPI is the only thing that’s been staying up. ISM survey, both manufacturing and services started to come down. Wages started to come down.
So I actually, ahead of the CPI, I thought that it would come down, but it didn’t. And I think it’s an anomaly. I think the CPI is and PC is staying up because of this lagged effect of rents in there. That’s so important. So I do think that the main story is disinflation and he’s hoping for that. And I think that’s correct.
While this move doesn’t show that, it shows he’s letting inflation run like I said before, but deep down inside, I believe that there’s an economy holding up story and disinflation story. The last two data points were jobless claims spike and CPI staying high, which is stagflation, but all year, it’s been a little bit more goldilocks, economy is staying strong and inflation not moving up, and I think maybe moving down except for these two key indicators, which are biased by this lagged rent effect.
So net-net, I think it’s overall bullish for this year. I will also say that I think the second half has the ability to be barn burner for the stock market up because I think we’re lapping Q3 of last year for earnings and this year earnings have been holding up. Action on earnings has been holding up and strong, which is a good sign for the market. And so Q3, I think you’re going to see earnings growth, especially in tech off of a very bad year last year. And I think that’s going to give a lot of support for the market for the second half.
And if you get this disinflation coming through in the core CPI, which might not be until the – in the fourth quarter, then yes, you can get the Fed to start cutting rates. Even though they say no way, no, how, but the CME is sniffing out and smarter than the Fed, so we’ll see.
KK: Okay. A lot for investors to digest there, a lot for us to unpack. Chaim, thanks so much for joining us today. I really appreciate it.
CS: Pleasure. Yes. Thanks for inviting me. Great idea. I appreciate it.
KK: Great talking to you. Thanks so much for listening to our special Fed Edition of the Wall Street Breakfast Podcast. We were joined by Chaim Siegel, who is the Investing Group Leader for Fed Trader on Seeking Alpha. And you can get all the Fed stories and coverage we’ve talked about in the story notes section of this podcast. You can also get a transcription of the podcast and the podcast itself at seekingalpha.com. Thanks for listening.
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