The Fed And The Market: Something's Not Quite Right

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Includes: DDM, DIA, DOG, DXD, EEH, EPS, EQL, FEX, FWDD, HUSV, IVV, IWL, IWM, JHML, JKD, OTPIX, PSQ, QID, QLD, QQEW, QQQ, QQQE, QQXT, RSP, RWM, RYARX, RYRSX, SCAP, SCHX, SDOW, SDS, SFLA, SH, SMLL, SPDN, SPLX, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SQQQ, SRTY, SSO, SYE, TLT, TNA, TQQQ, TWM, TZA, UDOW, UDPIX, UPRO, URTY, UWM, VFINX, VOO, VTWO, VV
by: Elazar Advisors, LLC
Summary

When Powell went all-out dovish on us yesterday I thought it must be because inflation would be flat or negative today. Nope.

Powell also said there's no more correlation between inflation and jobs.

Uh, did you see inflation and jobs report today?

Something's not quite right.

In Fed Chair Jerome Powell's testimony today he was quoted as saying,

"The relationship between the slack in the economy or unemployment and inflation.... has gone away."

Uh, wait a minute. Did you see the prints for inflation and jobless claims today. Jobless claims were very strong, as was inflation.

Really, when I saw those numbers I was in shock. They are cutting rates and inflation just hit a 1.5 year high. Something's not quite right.

Let's See The Data

Here's weekly jobless claims.

Jobless claims Source

Lower means stronger; ie less job-LESS claims = Less of less = more jobs.

Let's see inflation.

Core CPI MOM chart Source

While jobs are getting stronger, month-over-month core CPI also hit its highest in a year and a half and really equal to its highest in years.

So it's a bit ironic that the day Fed chair says there's no more correlation between jobs and inflation we see strong jobs drive strong inflation.

And A Rate Cut?

This is a very strange set up. If I were to tell you ahead of the Fed chair appearing in front of Congress that jobs numbers and inflation numbers were going to be blow out, what would you expect the Fed chair to say?

I would not expect him to sound more dovish.

Something's up.

And You Are Seeing Bonds and Yields React

TLT Bond Price Chart Source

Above is (NASDAQ:TLT). You see it getting hit on the Fed comments. This raises yields.

Higher inflation leading to higher yields is a market risk.

A Fed cutting rates in the face of stronger inflation and jobs is a risk that inflation could skip higher. That risks bond prices and stock prices.

What's The Risk?

This is only one month. But a strange one. I've been in this business a little while. Higher inflation and strong jobs are not reasons to lower rates. If anything, they are reasons to raise rates.

If these numbers continue strong, cutting rates now can exacerbate the rise in these data metrics. Then the Fed will have to reverse course and raise rates which is a market risk.

Conclusion

We had an extremely ironic turn of events between the Fed saying the inflation-unemployment relationship no longer matters. That's exactly the day that the data reported in lockstep. That's a day after the Fed talked about lowering rates. Something's not quite right.

Normally I'm speaking about tech. I do make market calls for subscribers daily. But this news today impelled me to write about it publicly.

Very ironic today.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: All investments have many risks and can lose principal in the short and long term. The information provided is for information purposes only and can be wrong. By reading this you agree, understand and accept that you take upon yourself all responsibility for all of your investment decisions and to do your own work and hold Elazar Advisors, LLC, and their related parties harmless. Elazar and its employees do not take individual stock positions to avoid front running and other potential customer related issues.