Good news, Bad news from the Federal Reserve First, we're going to break down a new piece from Nikki leaks. We're going to corroborate that with what banks like Morgan Stanley and JPMorgan Chase are seeing regarding the FED. Then we're going to talk about what to expect going forward and is there potentially some hope. Hey, everyone meet Kevin Here We are changing the pricing for the programs on building your wealth tonight, so check those out linked down below or consider locking in a flight with me and a shadow day if you're interested in shadowing me and learning more from me.

So go ahead and take a look at those link down below. And in the meantime, let's hop on over to this. What do we have here? We have Fed minutes show officials feared Market rallies could hinder inflation fight. So initially, this is actually bad news.

Take a look at this. The Federal Reserve's minutes had essentially uncharacteristically blunt warnings that cautioned investors against underestimating the Central bank's determination in fighting inflation. and the FED is anxious specifically because of financial conditions that seem to be loosening. And see, that's what's very interesting.

When we jump on over to Morgan Stanley we can see that the FED is right to be anxious. Financial Conditions are created by the sum of the following: strong dollar treasury yields that are high stocks that are low oil That's expensive. Basically all of these things combined together when they're going in the direction that makes things worse for us Again, like strong dollar or higher interest rates make it so that we spend less money on goods and services. ideally because we have less money me or because it's more expensive to make decisions.

Those things lead to an increase in financial conditions. Unfortunately for the FED since the end of November, we've actually seen those financial conditions plummet and this might explain why. Jerome Powell U-turn in November He was actually acutely aware about potentially over tightening and this is why it seemed like Papa Powell was like Hey. All right.

Look, we're gonna go through a tough time, but but we don't want to kill you and after that Financial conditions across the board actually loosened. Think about it. the 10-year treasure yield. Even though it's high right now at 3.76 it's not as high as it was back then.

I mean we were sitting around four and a quarter percent for a while on the tenure. That's crazy. A lot of these conditions have substantially loosened now. Well, that's nice.

Be because it means that hey, markets are starting to price in that. Okay, maybe inflation is falling more than expected. I Mean, just take a look at for example, what's happening in Europe and you could see exactly that. in Europe you have inflation falling from 11.3 to 9.6 Well, at least in Germany this is still double digits, but it's a nice drop in Germany Inflation in France and Spain fell more than expected.

This week, Turkey had a substantial decline in inflation. although, uh, they're still at like 64 inflation. It just came down from 85 percent. Don't mind Turkey though.

Uh and uh. You are seeing pain in the United Kingdom as well. That's suggesting that hey, inflation should be trending down. Manufacturing is shrinking at the fastest rate since 2009.

Shop closures are hitting the highest total in five years, mortgage approvals falling to the lowest level in more than two years. Italy's inflation at 12.3 from 12.6 Uh, year over year. So we're seeing declines. We're still at really high numbers, right? Don't be really excited.

In that sense, 12 inflation in Italy is still pretty dang incredible. But the idea is that markets seem to be pricing in okay, inflation is trending down. Let's start pricing in maybe a Fed cut. But the problem with that is, as soon as the markets start pricing in this idea of a Fed cut, we actually remove the very pressure that's been pushing inflation.

Down AKA Tighter Financial conditions as depicted by this chart. So the more inflation goes down, Ironically, the more likely inflation stays High longer because of the way markets are pricing in inflation dropping. Now this can set up in my opinion: A Good news, bad news scenario. A Good news: Inflation's coming down.

Bad news: Inflation going down leads to financial conditions loosening and the FED then has to get more aggressive. They have to talk dirty to us like they did in the minutes. They did not give us any hope in those minutes yesterday. and if anything, the minutes yesterday were concerning because the only source of optimism were actually ruined by data that came out yesterday morning.

the Joltz report. We already talked about that, but the point is, that's bad. the only hope that we have. So if good news, lower inflation leading to bad news from the FED I mean, just look at Neil Kashgari coming out suggesting that interest rates should jump to 5.4 and if inflation doesn't go down fast enough to two percent, we might have to go much above that.

This morning, Esther George comes out and says we need to continue to raise rates. The FED is realizing that markets are pricing in the pause I mean if you if we look at the Fed rate monitor, we'll see that right now, markets are only expecting a 25 basis point hike Feb One And to a large degree, look at this chart right here. It shows us that 98.1 certainty based on market pricing that we're only getting a 25 basis point hike Feb One: The vet has not indicated they're going 25 or 50. they haven't indicated anything.

The Market's just like yeah, we're pretty confident and this confidence has actually been rising towards 25 basis points rather than 50. Which is really interesting because the FED at the same time is trying to fight exactly this impression that the FED is going to slow down, things are going to relax and that's what they're doing. They're sending Esther George out they're sending Neil Kashgaria. Hey, go make a post.

They're telling uh, uh, what's his name Nikki leaks over at the Wall Street Journal to to make sure markets don't rally, they're scrambling to try to make sure that inflation does end up moving down because even though it is, the more we see it go down, the more excited people are that. Oh yay, let's go back to Rally mode in the market and that'll kill inflation again because inflation will Skyrocket And so here you have a Fed that the only hope we could have and then we'll write this one down. Okay, here's the only hope we have. The only hope if if you're bullish on this Market which I don't know how you could be bullish on this Market you'd have to be pretty insane.

But let's say you're bullish. Uh, and let's say you wanted some hopium. Okay, here's the only hope you could have. The only hope is that inflation does actually plummet.

That's it. That is. The only hope we have is that inflation proves somewhat transitory, right? It just took longer than expected, but it ends up going down. Consider for example, the CPI projections for next Uh, for the next CPI read: Coming out on the 13th, we're expecting zero percent month over month and 6.7 percent.

Uh, on the year over year. That's great. But now the expectations and this always makes me nervous. Now the expectations are are really getting ahead to where? Look, It was easy to beat Point Six percent month over month inflation expectations.

That was easy. So for example, two months ago, we came in at Point Four. That was easy, right? In my opinion, it's hard to beat zero percent month over month because basically you have to go negative. Now if we go negative on the month over month.

Oh good lord, that would be so great. that would be wonderful. But again, it could probably lead to a stock rally, which is going to piss the FED off even more. So you're actually in this weird position where any rally the stock market has and any kind of rally the bond market has gets crushed by more aggressive talk from the Fed.

So keep that in mind. Okay, any rally in bonds or stocks get sold because the FED will talk them down. Boom unless inflation plummets. Best case scenario: very very quickly.

Now, that kind of makes it tough to be bullish, right? Basically, if you're a bull, you are making a bet that we are going to get an inflation plummet and maybe it'll even be more of a glorious plummet than ever expected. In fact, inflational plummets so much that we don't even have to worry about the crazy jobs data. Because you know what? The jobs data just symbolizes imbalances in the market. And they're not actually going to lead to a rise in inflation.

Now that might sound crazy, or it might be possible. Consider the following: This chart right here shows US states that have recovered versus not recovered on payrolls compared to prior to the pandemic. What you'll notice is this massive shift from sort of Central America the Midwest ish and North uh in the Northeast to either the west or the South massive shifts here. Right now, this is kind of remarkable because it's a total change from what we've been used to and that, in my opinion, makes it really hard to look at comparative data and say oh yeah, we've got a you know, all this crazy new job creation and for example, continuing claims or the unemployment claims this morning came in better than expected, Which means we actually had less claims than we were expecting I Want to say we were expecting somewhere around 215 000 in terms of unemployment claims? Uh, let me get the exact number here: 215 000 and we ended up somewhere around 200.

Oh 204. we were expecting 225. We came in at 204. and that is better than expected.

but it's not so great because it kind of shows that even though we're expecting more layoffs and we see things like Salesforce cutting and Amazon cutting, we're still not getting a lot of layoffs because people are rebalancing where they want to live. But not only are they rebalancing where they want to live, look at some of these service sector areas. Comparing today's employment levels for Food Services drinking places, accommodations, and clothing stores. all three of these are still lower than where they were at the end of 2019.

So it's not a surprise that we're still creating so many jobs to some degree. Even though we know there are differences between the household and the establishment survey, it's not a surprise that there still is, to some degree some job growth because we're still in that rebalancing process. It's insane. And look at these.

for example. These sectors have exploded since before the pandemic. Professional and tech services. These are like Engineers lawyers, accountants, admin, and support.

Finally seeing a little inflection point, transportation and warehousing. Look at that. It's over a million jobs more than what we had. uh, before the pandemic.

So you've got this massive rebalancing of the jobs Market that Again, if you want opium and you want to believe that we go bullish, What you're betting is you're betting that the the tight labor market is really just a consequence of this rejiggering, right? So tightness equals regular ring. and as long as inflation plummets and the tightness really is just a re-jiggering and we don't get a wage price spiral, then yeah. okay, if that happens, it's time to be freaking bullish. But I Hate to say it.

This is a pretty dang big ask. It could happen, you know? I I Personally think you know maybe there's like a 40 chance this could happen. Okay, it's the best case scenario. Inflation plummets.

no wage price spiral. Best case scenario because then the FED can go from all its crazy Hawking Now to not Hawking And ironically, what they would actually be doing if this happens. If this hope scenario plays out, what happens, well, what they've actually done then is they've kept the market bearish for longer and more net short for longer, which potentially sets up for that squeeze. Now again, this is the Opium scenario.

You've got to be really careful about this because we do have concerns. An unwarranted fire easing of financial conditions complicates the committee's efforts to restore price stability. You've got JP Morgan Talking about no participants seeing a cut in 2023, we continue to look for a 25 BP hike in the next meeting with a risk of a 50 basis point hike you've got. Uh, further talk here by Nick T about this: this argument that any sign from this is a reference to quoting Neil Kashgari.

Any sign of slow progress that keeps inflation elevated for longer will warrant. In my view, taking the policy rate potentially much higher, this is much higher than the peak that he's forecasting of 5.4 percent. That would mean what 5.75 6 would be much higher than 5.4 Yikes. Now this is good core prices.

Right Over the three months ended in November core prices increased at three point six percent annualized, the lowest such reading since February of 2021. that's great. and it's also still a opium aspect that remember the FED is looking for Pce inflation to be at two percent, not CPI PC is usually lower and it's usually a good sign that the FED is looking for this number to average two percent, which means we actually could run a little hot for a little longer. So what do we have to take away from all of this? Well, we have to know that the more bearish stocks are right now is actually in a weird way good.

And I Know that sounds crazy, but the more bearish the market is right now, and the less rallies we have now does two things: one keeps the FED a little chill. number two gives us more of a buying opportunity. The more the fattest chill, the more comfortable they are that inflation is going to plummet. and then when inflation does, that's when we can actually see Financial conditions really actually loosen again.

I Mean, really, we want to get these Financial conditions back to like January 22 levels, right? That would be a huge rally in the stock market from where we are now And it's possible. But in the meantime we gotta act like, uh, you're right, fed, You're right. No rallies, no rallies. Okay, all right, we'll keep everything down.

Just we'll We'll be bearish. We'll be bearish. In the meantime, hope inflation plummets and we go rally. But remember, if you're a long-term bull right now in this market and you're excited for that big U-turn you're betting on inflation plummeting and no wage price spiral.

And if you think that's crazy and unlikely to happen like you think the larger likelihood is. Nope, more pain and we're getting the six percent Fed funds rates. Probably don't want to be long in this market anyway. Check out the programs link down below.

Check out the Shadow with Kevin Day Option link down below before those prices change today tonight. Thank you so much for watching. We'll see you next one. Thanks Bye.