Globe editors have posted this research report with permission of Rosenberg Research. This should not be construed as an endorsement of the report’s recommendations. For more on The Globe’s disclaimers please read here. The following is excerpted from the report:
There are too many rate hikes priced in, but the big deal is the end of QE and the onset of QT [Quantitative Tightening]. Farewell to the “wealth effect” on spending.
You look at the correlations and they say a lot. When it comes to the balance sheet, it has 90% correlation to the stock market but less than a 50% correlation to GDP. You go to the funds rate, it has only a 25% dampening effect on the stock market but an 80% negative impact on the real economy.
So what I’d be looking for now that the Fed has got the market reset for 4 rate hikes this year (and it is going to start in March, of that there is little doubt because Biden has already given a nod and all the FOMC doves are on board) is that the bigger surprise will be a quicker taper and quicker move to QT, and that is because it is the most efficient way to cool demand without crushing it. But the real damage is going to be for risk assets, and when you read the minutes from all the meetings of the past year, it is clear that the Fed is at least as concerned over asset bubbles as much as it is concerned that we have hit the wall on labor supply. And, in fact, one of the basic supporting mechanisms for this “Great Resignation” theme is this ingrained belief that people don’t have to go back to work because of their bloated portfolios.
Creating the conditions for a new and lower range for the equity market is going to suit the Fed just fine, and the Fed is a big believer in the equity and housing wealth effect on spending and that this runs in both directions.
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David Rosenberg