Jerome Powell's ego is on the line

The Fed's credibility looks shakier with every data dump

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Good morning investors,

In case you missed it, March CPI clocked in at 3.5% year-over-year, hotter than the expected 3.4% consensus estimate.

Stocks nosedived, bond yields spiked, and the so-called “immaculate disinflation” narrative weakened further.

Today we’re exploring the case against Fed rate cuts. Then, we’re getting into Taiwan Semiconductor stock, Larry Summers’ latest comments, and caution signs in the jobs market.

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*At a glance:

  • DJIA: 38,718.00, down 0.10%

  • S&P 500: 5,202.25, down 0.11%

  • Nasdaq Composite: 18,178.75, down 0.10%

  • 10-year Treasury yield: 4.536%, down 2 basis points

  • Gold: $2,357.50 per ounce, up 0.38%

  • Bitcoin: $70,851.04, up 2.80%

  • Brent crude: $90.62 a barrel, up 0.15%

*Pre-market data and moves as of 12:00 a.m. ET

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Powell’s legacy vs. the US economy

Federal Reserve Jerome Powell

The Fed has been signaling for months that it expects to ease policy about three times this year.

The latest Fed minutes release suggests that outlook remains intact.

Yet several economists have told me this week the Fed should now consider keeping rates unchanged, if not outright raising them.

Doing either, however, would be a blow to Jerome Powell’s ego and the credibility of the central bank.

At this point, the Fed has effectively communicated rate cuts are all but guaranteed. Failing to follow through could wreak havoc on the stock market, which has been on a tear to start the year.

Pushing forward with rate cuts, meanwhile, could open the floodgates for runaway inflation.

An unspoken part of the Fed’s job is telling us in advance what comes next so that markets don’t freak out when they adjust policy.

Backpedaling makes central bankers look bad, and investors get jittery.

Plus, this year in particular presents at least some degree of political pressure for the Fed to loosen policy ahead of the US presidential election.

One obvious lesson here is that it’s very hard to predict anything in financial markets, even for those who do it for a living.

To be fair, Goldman Sachs strategists, who are supposed to among the best in the world at looking around corners, have also changed their outlook multiple times this year.

Their latest revision came yesterday, and they said another tweak could follow the Producer Price Index report, which is due this morning.

“We think the Committee will need to see the string of three firmer inflation prints from January to March balanced by a longer series of softer prints in subsequent months,” the strategists told clients.

The bank now expect two rate cuts. One in July, and one in November.

Markets, for their part, have also shifted their implied forecast.

CME’s FedWatch Tool showed traders now give 17% odds of a rate cut in June.

One day prior, that hovered at nearly 60%.

More shocking is that, as of Wednesday, futures markets are pricing in roughly 13% chance of zero cuts in 2024.

Remember it was only a few months ago Powell gave an apparent victory-lap speech.

Greg Wilensky, head of US fixed income at Janus Henderson, which manages over $250 billion in assets, said the most likely path to a June cut involves a geopolitical event or “shockingly bad labor market data.”

“While we should not completely rule out a June rate cut,” Wilensky said, “I do not think we should be hoping for one at this point either.”

Elsewhere:

  • Former Treasury Secretary Larry Summers said he sees about a 15% to 25% chance that the Fed’s next move will be a hike. (Bloomberg)

  • The dollar held strong after the inflation report. The Japanese yen declined to a 34-year low against the greenback, raising concerns of currency intervention from Tokyo. (Reuters)

  • The labor market looks solid on the surface, but there are worrying signs bubbling just underneath the hood that could soon come to light. (BI)

Rapid-fire headlines:

  • Imports from China to US are rising fast (CNBC)

  • Shares of Taiwan Semiconductor Manufacturing climbed after reporting strong quarterly sales (WSJ)

  • Bank of America lowered Tesla’s price target (BI)

  • Meta stock looks cheap compared to other Magnificent 7 names (Bloomberg)

  • Fitch downgraded China’s long-term outlook to negative (FT)

Last thing:

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