?Expectations Up, Equities Down – Will the Fed cut rates with inflationary expectations rising so sharply? PCE print is higher today, while Michigan Survey spooked everyone—see chart below. – Will the Fed cut if inflation is rising sharply?– Not at this juncture, they are on hold for now. – Goldman and JPM now believe Q1 ’25 GDP is 0.0% GDP growth which will give credence to this questions: Is recession risk more probable? —Yes, risks are rising, however, my base case is +1% GDP growth. – Where is the Fed put? – The Fed seems dug in and won’t cut UNLESS the economy slows to 0.0%, unemployment rise above 4.5%, or equities decline >20%? – Update: the consensus from Blue Chip Economists calls for +1.6% GDP growth in 2025 (likely to be revised down to +1.4%), jobs are growing +150k w/unemployment rate holding at 4.1% (rate likely to rise). Q: Are equities sharply lower because: 1) S&P500 came into 2025 overvalued w/investors max long, 2) equity market anticipates economic slowdown which adds uncertainty/flat earnings? –Yes to both. – Credit Spreads are widening- yes (HY is +370 spread; +100bp wider from February tights), but HY price is unchanged; HYG is relatively unchanged y-t-d. – Credit Hedge Funds & Pod shops with big leveraged credit bets are unwinding risk in their book right now. For now, it’s is less a credit story and more a risk-unwind story—having said that, fundamentals are in flux, changing quickly so stay alert. – Stable Yield strategies should be your #1 strategy for 2025-2026! |
