Unpredictable Interest Rates Are Bad For The Economy

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In his Daily Market Notes report to investors, Louis Navellier wrote: 

Looking for Footing

Stocks are looking for footing after yesterday’s big step back.

Yesterday’s retreat on the Covid problems in China was more pronounced than expected. Despite the rally in China stocks today, our markets aren’t following this morning.

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It isn't helping that more than one major bank came out and said at least a mild recession is likely in 2023 and that will restrain meaningful market gains from current levels.

This takes us back to wanting a pivot from the Fed to bring relief, but the Fed members continue to talk tough now saying that future increases may be slower but that the level will still eventually increase toward 5% and will probably stay there longer than people seem to expect. We'll hear from Chairman Jay Powell tomorrow.

Unpredictable Interest Rates

Market pundits point out that the money supply has fallen for 7 months straight, faster than anytime, ever, and that the ramifications are unpredictable but are all bad for the economy. The focus on the overnight Fed Funds rate tends to ignore the shrinking of the gigantic Fed balance sheet, which will have largely unpredictable consequences because it has never happened before.

The Fed started letting $47.5 billion a month roll off in June of this year and ramped up to its planned limit of $95 billion a month in September. Theoretically, going from a buyer to a "seller" of US Treasury bonds and mortgage paper, interest rates should rise.

The fact that they're actually falling makes it that much more unpredictable. The only answer today is that, like raising Fed Fund rates, the full effect takes two to three quarters to ripple through the economy.

These uncertainties are another reason to have a strong bias toward companies with high-quality earnings and cash flows; offset the uncertainty of Fed tightening with companies having more predictable results. This bias is reflected in the recent strength of the Dow index.

Reasserting Seasonal

Other news of the morning include crude prices up a couple of dollars on rumors that OPEC may put another volume cut in, the pending railroad strike looks to be blocked by Biden and Congress, Cyber Monday sales set a record of over $11 billion, and a battle of words between Elon Musk and Apple Inc (NASDAQ:AAPL) over threats to block Twitter on the Apple App store. As the morning progresses, stocks are starting to climb and the VIX is lower.

With the consumer still spending and the China problems priced in, the seasonal strength should reassert itself and concerns about the bearish scenarios should be kicked down the road into the new year.

Coffee Beans

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