Daily Commentary

MarketMinder’s View: A popular financial headline narrative: US economic growth and the bull market depend on what the Fed does and says. This analysis takes that theme to another level, arguing the US economy avoided recession last year solely because of Fed chair Jerome Powell’s words. “At the press conference following the December meeting of the Federal Open Markets Committee, Powell struck a markedly dovish tone. Taking the markets by surprise, he acknowledged the Committee had discussed conditions for rate cuts and wouldn’t have to wait till inflation was at 2% in order to move. … For the markets – and the economy – Powell’s words matter. Anticipating an earlier than expected rate cut, the benchmark two-year Treasury yield fell from 4.7% the day before Powell’s press conference to a low of 4.1% in mid-January. The impact of those lower borrowing costs, and a renewed rally in the equity markets, rippled through the economy – giving a fresh impulse to growth.” The evidence: The three-month moving average of unemployment started to tick higher, close to triggering a supposed recession indicator, but Powell’s “December pivot” halted the downturn. Folks, this vastly overrates monetary policy’s impact. Put yourself in a business owner’s shoes: Are you going to add to your workforce simply because the Fed “… discussed conditions for rate cuts and wouldn’t have to wait till inflation was at 2% in order to move?” No! You likely have myriad other variables to consider, from the cost of labor to industry-specific trends. Prospective monetary policy, which hits the economy at a long, undetermined lag, likely isn’t top of mind for your December business decisions. (Oh and jobs data are late-lagging indicators, not leading.) Finally, the gauge here is beyond suspect: Using a tool that tallies headlines about the Fed isn’t a sign the Fed is this important or powerful. It is an echo chamber. In our view, the chatter here is the ultimate example of Fed rate cut obsession—and the misperception that an all-powerful Fed drives the economy. For some more perspective, see our January commentary, “The Bull Market Doesn’t Depend on Rate Cuts.”

MarketMinder’s View: We found this in-depth look at Europe’s energy situation a mixed bag—the review of recent history illustrates the power of market forces while the forecasts about Europe’s energy future struck us as skeptically speculative. Our focus is on the former since it illustrates why longer-term forecasts must be taken with several grains of salt: a lot can change in a short amount of time. Go back to early 2022 after Vladmir Putin’s invasion of Ukraine spurred projections of European blackouts due to the Continent’s dependence on Russian energy. That didn’t happen for several reasons. First, there was warmer-than-anticipated weather, which allowed EU nations to build up gas reserves. The EU also accelerated its rollout of other energy sources, using wind and solar power to save on gas consumption. Perhaps most critically, Europe found gas elsewhere: “New infrastructure like the Wilhelmshaven terminal [in Germany], which came online in December 2022, has enabled the EU to become a significant importer of LNG. In 2021, it made up only 20 per cent of the EU’s overall imports of natural gas. In 2023, it accounted for 42 per cent. Nearly half of the supplies last year came from the US, now the world’s largest LNG exporter after its shale boom, and the bloc also sourced significant volumes from Qatar, the third-largest exporter.” Now, these adjustments don’t mean the transition was painless—temporarily sky-high energy prices roiled Europe’s industrial sector, knocking Germany and its mighty chemicals sector in particular. But the worst-case scenario of rolling blackouts across Europe also didn’t come to pass—an example of reality turning out better than many feared.

MarketMinder’s View: According to “people familiar with the matter,” Japanese authorities intervened to support the yen today, as “The dollar fell sharply to 155.01 yen from as high as 160.245 earlier in the day. Banking sources said Japanese banks were seen selling dollars for yen. It was last fetching 155.50 yen. Traders had been on edge for weeks for any signs of action from Tokyo to prop up a currency that has fallen 11% against the dollar so far this year. The yen plunged to 34-year lows even though the central bank exited from negative interest rates in a historic move last month.” But as noteworthy as Japan’s intervention sounds, it isn’t likely to materially impact the yen’s movement over the longer term. Global moves override local ones (e.g., the trend of other major central banks to hike while the Bank of Japan has kept rates low/negative). For some recent evidence, consider: “Japan intervened in the currency market three times in 2022, selling the dollar to buy yen, first in September and again in October as the yen slid towards 152 to the dollar, a 32-year low at the time. Tokyo is estimated to have spent around $60 billion defending the currency.” But while those moves may have cushioned volatility in the short term, they haven’t prevented the yen from continuing to fall. Though the Bank of Japan has taken steps recently to “normal” policy, the yen at generational lows (and its negative impact on domestic businesses) is a reminder of wonky Japanese monetary decisions’ side effects—they haven’t been the automatic economic boost many thought they would be.