Let's consider the following cluster of events:
(1) The Fed has just signaled it'll announce a taper next month, but
(2) The economic data have started rolling over, and
(3) Powell and two other key Fed officials are up for reappointment in the months ahead.
This is what has Jefferies strategist David Zervos warning that the Fed is on the precipice of making a big policy mistake. We spoke to him about this at the top of the show yesterday (full interview here). He took the huge drop in consumer sentiment Friday as a major warning sign. It was followed by the New York manufacturing survey tanking yesterday, and now today's big retail sales miss.
"GDP is still up just 0.1% cumulatively since the end of 2019," Zervos said. "I don't understand why there's a rush [to taper] when we're still dealing with Delta." Even the inflation numbers are misleading, he warned. "We've had a decade of inflation misses, and a demographic shortage in the labor market still causing deflation and disinflation problems."
The irony is that just as the data have started missing--even homebuilder sentiment retreated this morning--the Fed has been carefully messaging its hawkish turn with CNBC and The Wall Street Journal reporting they will likely announce tapering next month. ("Am reminded of another August" when the Fed had to push back its taper plans, Michael Santoli tweeted yesterday in reference to 2013.)
The Fed can't turn on a dime here, Zervos warned. Not only do they tend to move slowly (remember how drawn out their about-face on rate cuts was back in 2019?), but Powell and two vice chairs are up for reappointment in the next few months. "They have to talk a little tough...to get through the Congressional gauntlet," Zervos said, meaning hawkish rhetoric on tackling inflation. "That, to me, is the only real risk for the S&P 500."
Oh, but won't a trillion-dollar infrastructure package come to the economy's rescue? Even if happens, wrote the economist David Rosenberg yesterday, "Nobody should be shifting their macro view because of infrastructure spending that generally takes years to get started, and years to get finished."
And maybe all of this is why bond yields remain so disappointingly low. The 10-year Treasury yield has fallen from about 1.75% to 1.25% as taper talk has picked up, Greg Ip pointed out on Power Lunch yesterday. That's not exactly a message of strength. You have to wonder if the only way to reignite the value/reopening trade (the financials have basically gone sideways all summer, energy and airlines are down), is for the Fed to "taper" its own taper talk.
See you at 1 p.m!