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Friday, August 12, 2022


Quantitative Tightening Is Upon Us


Courtesy of The Daily Contrarian

The Fed officially starts reducing its balance sheet today, another move aimed at removing the proverbial punch bowl…

[Listen to the podcast here.]


Good morning contrarians! Welcome to June!

June 1 marks the official start of the Federal Reserve’s quantitative tightening, or QT, when the Fed starts to reduce its balance sheet. You’ve likely heard a good deal about this already. It’s hard to see how it hasn’t been priced in for a while — with the caveat that there could still be secondary effects that nobody has anticipated. More on this in the bottom line.

State of Play

Stock futures are a bit mixed but mostly quiet as of 0630. Dow Industrials are up 0.3% and the Russell 2000 which tracks small caps is down about 0.5%. S&P 500 and Nasdaq are about flat. Individual stocks making moves this morning include Salesforce (CRM), which is up 9% after beating earnings.

Bonds are continuing to sell off a bit. The yield on the 2-year is up 4 basis points to 2.58% with the 10-year up 2bps to 2.87% (yields move inversely to prices).

Commodities aren’t doing much. WTI crude oil is up 1% to trade around $116/barrel. Cryptos are flat too with bitcoin unchanged around $31,600.

Economic Data Releases

The Bureau of Labor Statistics releases the Job Openings and Labor Turnover Survey, or JOLTS, at 0900. Economists expect job openings to have held steady at 11.4 million after 11.5 million seen last month. There are a ton of interesting details in this report, the ‘quits levels’ being a personal favorite (and also one cited by Fed chair Jerome Powell in his press conferences).

It’s no secret that U.S. employment is in very good shape and the quits levels bear that out: 4.5 million workers, or 3% of the workforce, voluntarily quit their jobs last month. People simply don’t quit jobs by their own volition unless they have a more lucrative opportunity lined up (or are really optimistic about their chances of going it alone).

The Fed Beige Book is also out at 1400. There is no survey number for this as it is a report on economic conditions from each of the Fed’s 12 districts. There are only eight of these reports a year (this is the fourth of 2022). It’s worth watching to see how business conditions are holding up and what has the business community concerned — in this case, one can expect inflation to be front and center.

We also have Markit and ISM Manufacturing PMIs at 0945 and 1000, respectively. Economists expect a reading of 57.5 for the former (58.2 last month) and 54.5 (55.4) for the latter. Economists also happen to be the only people who really follow these as they rarely move markets. But it’s an important indicator for the health of the manufacturing sector in the U.S.

Construction spending is also out at 1000. Economists expect a 0.5% increase month-over-month, an improvement on the 0.1% seen for March.

Seeing how it’s Wednesday we also have MBA Mortgage Applications. There is no survey number for this. Last week they dropped by 1.2%.


Chewy (CHWY), GameStop (GME), PVH (PVH), Pure Storage (PSTG), Hewlett Packard Enterprises (HPE), and American Superconductor (AMSC) all report after the close at 1600.

The Bottom Line©

In general, the Fed removing the proverbial punch bowl is the most surefire catalyst for economic contraction. There is usually a lag between the time the Fed starts these moves and the onset of a recession. But what we’ve seen from risk assets this year is quite consistent with a recession, even if most (really all) economic data is still pointing to expansion.

This appears to make for quite the conundrum: economic data pointing to expansion while financial markets are screaming recession. But taking financial markets as forward-looking indicators, maybe the whole thing isn’t so odd. Markets are pricing in a recession because markets know what happens when the Fed tightens monetary policy.

Markets could still be wrong here of course. Wouldn’t be the first time. If so, that would make for quite the buying opportunity. And if not? Then the question becomes just how bad things get before they get better. Here investors tend to deny the reality quite a bit, going back to our stages of grief discussed last week. Either way, we won’t know who’s right for a little while. Whatever your views, remember to do your own research and make your own decisions.

Today’s briefing and podcast were free. If you enjoyed this consider subscribing. Sign up for a year and get 20% off.

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