By Vincent Cignarella, Bloomberg Markets Live reporter and analyst
The Fed is hiking blindly into an economic downturn, putting pressure on risk assets unnecessarily.
The good news, with cash levels at the highest since 9/11 and equity allocation the lowest since the Lehman collapse, if the Fed stops sooner than many think, the second half of 2022 risk rally will be enormous (ZH: and they will: according to Michael Hartnett, the Fed will pivot in November, while Marc Cabana says QT will end well ahead of schedule).
Housing and retail began to turn lower in October of 2021, retail likely as wages failed to keep up with inflation and housing due to higher prices and less inventory. That trend continues into this year, possibly leveling off in June before likely resuming a turn lower.
The rate hikes which began in March of 2022 came some 22 months after the economy began to recover and now are coming at a time when the economy is slowing down, which will likely cause even slower growth.
The Federal Reserve Bank of Atlanta’s GDPNow index suggests U.S. gross domestic product will retract -1.59% in the second quarter. That is two consecutive negative quarters of growth; the Fed is hiking into a recession.
As growth slows, there is a high degree of probability that inflation will peak and begin coming down to the Fed’s target. There is no real reason to aggressively tighten rates.
The Fed will see this as the data shows slowing growth and at least temporarily halt the rate hike cycle, igniting a surge in risk into 2023.
