Monday's 1.5% haircut for the S & P 500 was largely attributed to the unrest in China, but several traders brought up Fed Chair Jay Powell's Wednesday's speech at the Brookings Institution. The subject is "The Economic Outlook and the Labor Market." The fear is that Powell will use the speech to smack down the modest market rally (about 10% since the Oct 12. bottom), which is largely based on the belief that the pace of rate hikes will begin to slow in December. It didn't help that midday yesterday St. Louis Fed President James Bullard said that "markets are underpricing a little bit the risk that the FOMC will have to be more aggressive rather than less aggressive in order to contain the very substantial inflation that we have in the U.S." Bullard reiterated the "higher for longer" theme, noting: "I think we'll have to stay there all during 2023 and into 2024." There it goes again: you traders are too optimistic. We're not ending the rate hikes any time soon, and we are going to stay higher for much longer than you think. Those comments, along with other hawkish sounding statements from Fed Vice Chair Lael Brainard, have everyone convinced Powell will pull another Jackson Hole on Wednesday. "They are all setting the stage for a hawkish performance from Chairman Powell on Wednesday, despite the step down in the pace of rate hikes," Mike O'Rourke from Jones Trading said in a note to clients last night. Powell is also likely unhappy about the decline in bond yields: the 10-year Treasury yield has to 3.66% today from from roughly 4.2% three weeks ago. "That also has, from their [the Fed's] standpoint, the perverse effect of easing financial conditions, i.e. offsetting some of what they are trying to do, and so I think their focus has to try to keep the 10-year [yield] from dropping too much, to try to keep financial conditions relatively tight, so they can finish their job without having to deal with an economy that starts to take off again," former Fed vice chair Roger Ferguson said on CNBC this morning. Indeed mortgage rates are already lower: A 30-year fixed rate mortgage has gone to 6.81% today from 7.24% on November 11th, according to Bankrate. So there you have it: the Fed wants tighter financial conditions. They don't want stocks to rally, yields to decline, mortgage rates to drop until there are persistent signs that inflation is cooling off. Little wonder the bears think there is a ceiling to the market rally: Assuming earnings will be flat next year ($220) and the market remains at an historic average multiple of 17 times forward earnings, the value of the S & P 500 is currently 3,740. That is 200 points lower than were the S & P sits today. The issue is, how many times is Powell going to reiterate this theme before it gets old?
