Something for your Espresso: The market is slowly starting to get the memo
Good Morning from Europe
The melt-up in assets continues on the back of Powell’s “green-lighting” of a rally. It will be interesting to see whether the Fed will start to back-paddle in coming weeks after seeing the reactions. We certainly lean that way.
Interestingly, this is an odd cycle out, if the July hike was indeed the last hike from the Fed in this cycle (we still doubt it).
Equities have fared much worse than the average pattern around a Fed pause, likely as the feedback loop from financial conditions to Fed Funds policy rates has been introduced.
Chart 1: How have equities fared around a Fed pause?
When Powell allowed market based conditions to dictate the Fed Funds path, he indirectly also introduced a hawkish reaction function, if risk and term premias abate in coming weeks.
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