Higher For Longer & A Soft Landing | Top Things to Watch this Week

Posted: Sept. 11, 2022, 8:14 p.m.

Higher For Longer & A Soft Landing

"When you see someone doing something that doesn't make sense to you, ask yourself what the world would have to look like to you for those actions to make sense."  - Shane Parrish

Chart Booklet & Podcast

Access all of this week's charts used in today's writing and Macro Corner Episode 15 for tomorrow: Chart Booklet

Check out last week's podcast episode on Fiscal Dominance and what it means for asset prices going forward: Macro Corner Podcast, Episode 14

Email [email protected] with any questions as it pertains to today's article or any Macro Corner podcast episode -- we are more than happy to discuss! 

Is Higher For The Longer The New Lower For Longer?

First and foremost, today we remember the victims of 9/11 and their families who were left behind. Blue Line's thoughts and prayers are with those affected by that day's terror!

Market participants of all shapes tend to talk about the extreme of outcomes, while those very outcomes are often at the tail end of the probability distribution. In other words, the likelihood that extremes play out are rather small in the grand scheme of things. It's got to be a crash or another epic rally, doesn't it? Partially, we've been hard wired that way; partially, our own mortality makes us think that anything and everything has got to be "unprecedented"; by definition, unprecedented describes an extreme conditions. 

As a matter of fact, however, markets are as old as the hills and macro gods have seen stranger things before. Hence, it is important to find a balance between entertaining tail-end outcomes while realizing that the shape of the distribution is one that favors the median outcome over the extreme.

The Fed has successfully raised rates from the zero-bound - something that was described as very challenging by Ben Bernanke, - to a target rate of 2.25-2.50. Additionally, the market is pricing another 75bps hike in September and is calling for a 3.75-4.00% target by December. In conjunction with a balance sheet runoff to the tune of $95bn/month, they are making solid strides towards tighter financial conditions restraining heightened demand. I would argue that very few people would have seen the S&P 500 at 4,000 and bond markets relatively calm despite low liquidity. In other words, the Fed hasn't hit a brick wall despite an unfavorable backdrop of high debt levels, high inflation and deteriorating economic conditions on the back of post-pandemic spending dynamics. 

One way of looking at this conjunction is to call the Fed's current policy a success and expect smooth sailing going forward. Another way of looking at it is that we are going to hit the inevitable brick wall as they define the health of the economy at large as fully conditional on price stability. As the Fed's Vice Chair Clarida put it on CNBC this week: "Until inflation comes down a lot, the Fed is really a single mandate central bank."

If the Fed is indeed a single mandate central bank, it will be challenging to not see the effects of tighter financial conditions flow through into the real economy, profit margins etc. For now, however, markets are sensing relief as signaled by breakeven rates, supply chain bottleneck indicators and raw material prices.

Data & Commentary

Breakeven rates (the difference between nominal and real yields) are settling in despite elevated inflation. Yes, these rates are forward rather than backward looking, which indicates the markets' vote of confidence in the central banks' ability to control inflation over the long haul. The same dynamic is playing out on the short-end where 1-year and 2-year breakeven rates are falling of a cliff, quite literally. Just in February of this year, the 1-year breakeven was above 6% and is down to 1.7% as we speak. 

This means that the market is more likely than not discounting something closer to a soft- rather than a hard landing. 

The echoes of a soft landing are also reflected in raw material prices deflating substantially.

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Despite deflation in raw materials, it is paramount to remember that indices can obscure individual components. While relatively less critical parts may return to normal, some essential components may stay elevated. 

Coming off of elevated durable goods spending, markets are starting to pay increased attention to services inflation. Nevertheless, spending on goods remains crucial as the profit margins of companies selling goods had rapidly expanded.

There are few things more mean-reverting than profit margins, leaving us with question marks behind margins. 

Unlike deflation reflected in breakeven rates, shipping rates, raw materials etc. , fossils and materials remain scarce. While there are some signs that capital is slowly but surely starting to return - fracking in the UK and permits for the North Sea, - issues created over the course of decades won't disappear over a span of months.

Perception might be obscured by rhetoric, reality is path dependent on the laws of physics.

As markets find comfort in the trends that may imply a soft landing, one has to imagine alternate realities and examine the probabilities of such scenarios. As found in the "Food For Thought" section, monetary policy has a lagging effect on profit margins. As indices continue to be geared towards growth names, a reshuffling of where value is going to be had does also have implications for markets.

While some indicators may suggest a quick return to 2% average inflation at which point the Fed will loosen policy, a paper by Domash and Summers indicates that wages are predicted to keep rising -- wages driving prices are crucial in the determination of the economy's path forward. 

If the Fed can successfully engineer the balance sheet run-off while continuing to deal with inflation from energy, materials, housing and labor, higher for longer may be a new reality. For now, markets appear to lean on the recent past rather than the fullness of history when extrapolating the path of earnings & multiples.

Until next time, good luck & good trading.

Be sure to check out prior writings of Top Things to Watch:


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Economic Calendar


Data Release Times (C.T.)


Data Release Times (C.T.)


Data Release Times (C.T.)

More Of The Upcoming Economic Data Points Can Be Found Here.


Food for Thought


Oracle (ORCL) reporting after the close on Monday:

  • Consensus: EPS est. $1.08; Revenue est. $11.46bn

Commentary on the following will be monitored:

  • Follow through momentum on what the company called a "new hyper-growth phase" in the last earnings report
  • Cerner and Oracle healthcare service provision


Adobe (ADBE) reporting after the close on Thursday:

  • Consensus: EPS est. $3.35; Revenue est. $4.43bn

Commentary on the following will be monitored:

  • Creative Cloud adoption
  • Document cloud


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Inflation Underinvestment Raw Materials Soft Landing Consumer Demand Federal Funds Breakeven Rates

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