MRM Commentary


Monthly Investment Commentary

September 2022


          • Fed Chair Powell delivered another hawkish speech in Jackson Hole, implying a “higher for longer” mantra even as efforts to rein in inflation come with economic pain
          • August was another painful month in a historically bad year for fixed income investors, and recent labor market and inflation data suggest the Fed won’t let up anytime soon
          • Residential rent prices have surged over the last year, and the lag effect could apply upward pressure on the housing inflation metric of CPI for months to come

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      MRM Portfolio

      Higher for longer. That is the message from Fed leaders of late regarding the fed funds rate, combating market speculation of a Fed pivot at some point in 2023. The bond market has been swifter to accept this guidance from policymakers, with front-end Treasury yields repricing approximately 50 basis points (bps) higher in August leading up to Jerome Powell’s August 26 Jackson Hole speech. However, there had been a large pocket of equity bulls still holding out hope that Fed leaders’ inner-dove would emerge, but the combination of renewed hawkishness from Powell in Jackson Hole and more hot data on inflation and the labor market has effectively poured cold water on hopes that the Fed is contemplating a pause or 2023 rate cuts at this point.

      Fed Pivot
      Prior to Jackson Hole, Powell had acknowledged that a slowdown in the Fed’s tightening effort may be appropriate “at some point,” and even though he offered no timeframe for the vague observation, it further emboldened the “Fed pivot” camp. With this in mind, Powell delivered a much more concise 10-minute speech, the shortest by a Fed chair at the Jackson Hole conference since 2010, with the likely goal of leaving no room for obscure comments to be misconstrued as dovish. Fed leaders have also made it clearer in recent weeks that price stability is the priority at this point and that a soft landing for the economy is a secondary and unlikely objective.

      To that end, the data of late have shown little signs of the recession narrative that emerged in mid-June, at least not yet. In the labor market, job growth remains strong and unemployment low. One metric that has been a clear area of focus for Fed Chair Powell is the number of job openings relative to the total number of unemployed persons. After rising to a 2:1 ratio in March, it appeared to be moving in the right direction in the months that followed, albeit still well above historical norms. However, the ratio unexpectedly rose back near the March peak in July, with more than 11.2 million openings.

      MRM'S VIEW

      August was a painful reminder that financial markets are not out of the woods yet in what has been a historically bad year. As we have noted for several months now, volatility is likely to remain elevated until there is more clarity on inflation turning the corner and heading lower on a sustained basis, and it’s hard for that to happen when the labor market is still burning hot. However we remain bullish on the long term.

      Source: ALM First

      MRM model holdings as of June 30, 2022



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