Defiance

The Powell Fed resistance to supply side tax policy, the UST market rejects the regional revolt, Sam I Am and AI Credit, China's 'L' shaped economy

Warning: This week’s FOMC analysis would have been toned down by our supervisory analysts at Barclays or Guggenheim. We hope no one takes offense, but this week’s Fed speeches and appearances, with a couple of exceptions, were in a word, misguided.

In this week’s note…

• The Powell Fed has been a major impediment to the manufacturing renaissance. Shortly after the passage of the Tax Cuts & Jobs Act they embarked on a tightening cycle. They were all in on Biden’s modern supply side industrial policy that slowed capex. They are currently muting the impact of One Triple B. Their actions imply an ideological aversion to supply side tax policies that we consider crucial to onshoring.

• The reaction to this week’s hawkish Fed speeches was lower rates across the curve with the exception of the December federal funds futures. In short, the market viewed the regional Fed President defiance as increasing the risk of a non-linear increase in the unemployment rate (recession risk).

• Sadly, a failure to steepen the curve that would reopen the small bank credit channel leading to a recovery in housing construction increases the probability of inflationary consumption stimulus.

• Technology earnings revision momentum began cooling before earnings season and is continuing lower ahead of Nvidia’s results next week. We are watching credit closely, and while there are plenty of anecdotal warning signs, demand for AI infrastructure debt remains sufficient to absorb the growing supply, for now.

• China’s October economic data, and sector performance, relative to the US ‘K’ shaped economy is more like a ‘L’.