DISINFLATION IS THOUGHT TO REPLACE THE NEED FOR FED HIKES
US equities were stronger Wednesday, with the S&P 500 up 1.4% following a better tone in Asia and Europe as volatility seen in recent weeks has diminished, at least for now. US10yr yields down 1bps to 3.56%, 2yrs up 1bp to 4.09%.
And the beat on US pending home sales suggests things look much better than expected, especially with many thinking the property market could be the next domino to fall.
Amid the recent banking turmoil and reduced credit availability impulse, investors now think this could be a favourable headwind that helps the Fed keep US growth below potential.Â
The good news for stocks is that growth concerns have moved into the driver's seat after the recent policy shock, where investors are now positioning for the Fed to cut and to now instead rely on credit tightening to tame inflation.Â
Indeed speculative money is now betting on the disinflationary impulse from tighter credit will reduce the need for monetary policymakers to slow the economy through rate hikes, which could potentially even cause the Fed to cut.Â
While this is good news for the handful of Mega Tech stocks that dominate price action at the index level, driving inflation into submission via credit crunch is not ideal for those the screw in the nuts and bolts of the real economy. The damage to US growth will be significant but concentrated on those companies dependent on smaller banks, where most don't even register at the index level.Â
Nevertheless, according to this morning's market temperature check, investors do not believe the credit crunch will be of the hurricane variety that veers the economy into recession.Â