Fra Saxobank:
Action: Take profit on long NASDQ from earlier this week (7300 vs 7014). New position: Neutral
Why it matters: The slow-down in data is now no longer “incoming” – it’s present tense, meaning risk goes from “buy the dip”, courtesy of the Fed, is not enough. The Fed is seriously behind the curve and in denial!
Context: If the market is only pricing the adjustment of lower rates – they should and will buy market. This only confirms that the Fed is cutting rates by June, but if market gets the feeling that the Fed is behind the curve and we risk an actual recession, then this is major market SELL SIGNAL….
The math:
Assume 50% probability of recession during Q3 or Q4 – Average drop from peak to trough: 50% in recession, further assume there is 20% upside for balance of the year.. hence weighted risk is:
Upside 10% expected return (50% * 20%)
Downside 25% expected negative return (50% * 50%)
Or more simply – right now there is 10% upside potential with a negative 25% risk – not a great risk/reward…
Chicago FED – National activity level DEEPLY negative……
We continue to be surprised at how much the FED is in denial: New York Fed President Williams is the second most important vote on Federal Reserve board and he said yesterday:
Federal Reserve Bank of New York President John Williams said the outlook for the U.S. economy remains solid while acknowledging that risks are rising and that investors expect the central bank to lower interest rates in response.“My baseline is a very good one but at the same time we obviously, as always, need to be prepared to adjust our views,” said Williams, answering questions from a moderator and the audience following a speech in New York on Thursday.
And then he made things worse by stating below – the only word for this must be “willful ignorance”?