Date: May 1, 2024

***Special Fed Update – “Our Progress Has Stalled” – “Oops I Did It Again”***

This will be a quick Fed update as I am traveling and lost two hours this morning when my Uber ended up at a mobile home park rather than at the airport.

The stock market model for the day is plus or minus 0.50% and then a volatile rally after 2pm. Given the weakness this week, the model is reinforced and has a stronger likelihood of success. It is also the first day of the month coming on the heels of a pullback which gives more credence to strength today. That is juxtaposed against some challenged earnings and/or guidance from Advanced Micro, Super Micro, CVS, Starbucks and Estee Lauder. In short, the models say to buy down 0.50% or more and sell strength.

Jay Powell and the FOMC will take no action today. In their statement and Powell’s press conference, I full expect to hear that the Fed’s “progress has stalled”, a polite way of quoting Britney Spears and saying, “Oops I did it again”. For the life of me, I cannot figure out how all of the Fed heads forecast so many rate cuts inn 2024 without a single shred of evidence from the data. Let’s not forget that Powell and his Fed minions hid behind the phrase “data dependent” for many quarters when hiking rates.

It is likely that we will hear the beginnings of their plan to taper asset sales from their balance sheet. I would think that the Fed will alter the treasury portion on their sales and keep selling mortgage securities. While I vehemently disagree with any taper I think it’s going to happen, especially if the reverse repurchase agreements continue to decline. Personally, I would keep on keeping’ on until the Fed unwound 100% of the COVID asset purchases.

Below should be a familiar chart as I show it early and often. It is the 2-Year Treasury versus the interest rate the Fed controls, the Fed Funds Rate. Coming into 2024 the pundits and Wall Street were looking for 6-7 rate cuts. I thought that was insanely crazy. At best, our work saw 2-3 cuts with the risk being less or none. The 2-Year yield has now rallied to 5% which is only 1/4% away from the Fed Funds. In other words, the market is at the lower end of equilibrium which is 5% – 5.50%.

Right now, there are no rate cuts on the horizon as inflation remains sticky and stubborn, one of our themes for 2024. For the Fed to go back to having rate cuts in their plan, the 2-Year needs to decline at least to 4.5% and lower. As I have written lately, I would be very concerned if the 2-Year got above 5.5% and didn’t immediately reverse. That would be bad for “risk on” assets and the economy.

On Monday we sold some levered NDX. On Tuesday we sold EMB and PMPIX.


Paul Schatz, President, Heritage Capital