The Fed Has Really Screwed Things Up

They have no idea the damage they have inflicted on the economic outlook

Highlights

• The yield melt-up has pushed the bond bear market to historical levels — deeper than the Volker era, and in line with the worst bear markets in equities

• Market moves have all been about the Fed — payrolls, real estate, core PCE, GDP revisions and inflation expectations and the fiscal outlook have all softened

• We think the official recession will begin this quarter, and will arrive no later than Q1 next year

• Contractionary services PMIs out yesterday emphasize Europe isn’t doing any better

While We Were Sleeping

U.S. futures are pointing to a moderate fall-off, and we have now reached a stage where only 12.5% of the S&P 500 universe is trading above its 50-day moving average and the CNN Fear - Greed Index is in “extreme fear” terrain at 23. If the stock market cannot recover from this oversold position (and it isn’t happening in the pre-open trade), trouble is going to be brewing for the long-only crowd. The good news is the +0.4% uptick in Europe (and gaining momentum), as well as the impressive rebound in Asia (which looks more like the proverbial “dead cat bounce”): Japan’s Nikkei 225 (+2.8%), Taiwan (+1.1%), India (+0.7%), Singapore (+0.3%) to name a few. All in (China is still closed), the MSCI Asia Pacific composite closed with a +1.1% pop and Emerging Markets are on pace to edge higher by +0.4%. Asia Pac had become oversold technically after suffering a -10% drawdown from the July interim highs (bouncing off official correction levels).