Analysis: December Fed Minutes Released. Quick, concise commentary.
Strategy Email for both Public and Private friends
Note: This is a brief after-markets recap note to both my Public and Private communities. Given this post is opened to the public, feel free to share this note with like-minded investors like yourselves.
Going forward, my analyst team emails will be sent 1x per week. I will do my best to produce more content on Youtube.
Public and Private friends,
The Fed released their Fed Minutes today from their December FOMC meeting. My analyst team put together a summary of key highlights from the transcript, which I will share shortly below.
Before we jump into the analysis, I wanted to share a couple of observations from my 2023 January report that I released on January 2nd. As part of my own personal journaling and learning process, I like to share what’s working well, and what’s gone against me.
We discussed that China had further upside as a sector, and have included a blurb here. Specifically, we talked about how the market risk premium on China is potentially lowered because of more welcoming U.S.-China relations in 2023. The China rally today was related to regulators approved Alibaba’s consumer finance business (Ant). As we approach levels where we believe risk-reduction is warranted, we’ll let members know. For now, we don’t change our constructive conclusion on China.
I also discussed the fact that the fixed-income TLT ETF would see its sell-off be short-lived and the ETF has since bounced. The TLT ETF represents the long duration part of the yield curve and is sensitive to economic projections.
On Tesla, at the end of December, I was looking for a continuation recovery into 130ish region before 4th Q deliveries. We got to around 123, but never quite made it to that 125-130 threshold. Because of this, my sell orders never filled and I stayed in. Post 4th quarter deliveries with the gigantic selloff, I was stopped out at 108 (previous December low) at quite a meaningful loss. I still think a recovery can happen, but my own rules force me to get out if there is a lower low in a double-bottom formation. My limit orders may have had me sell at the bottom in hindsight, but rules are meant to be followed. I’m more interested in following a process every time. For Tesla shareholders, I hope shares rebound.
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On with December Fed Minutes
In case you wish to read the full Dec. Fed Minutes, here is the link to the full document.
Here is a summary of the most important key points below, in our view.
Fed not pleased with investors… “Participants noted that, because monetary policy worked importantly through financial markets, an unwarranted easing in financial conditions, especially if driven by a misperception by the public of the Committee's reaction function, would complicate the Committee's effort to restore price stability."
Slowing rate hikes is not pivoting… “A number of participants emphasized that it would be important to clearly communicate that a slowing in the pace of rate increases was not an indication of any weakening of the Committee's resolve to achieve its price-stability goal or a judgment that inflation was already on a persistent downward path.”
Few signs of a wage price spiral… “Consequently, while there were few signs of adverse wage-price dynamics at present, they assessed that bringing down this component of inflation to mandate-consistent levels would require some softening in the growth of labor demand to bring the labor market back into better balance."
Inflation forecast… "Core goods inflation was anticipated to slow further, housing services inflation was expected to peak in 2023 and then move down, while core non-housing services inflation was forecast to move down as wage growth eased."
Inflation Risks skewed to upside… “With inflation still elevated, the staff continued to view the risks to the inflation projection as skewed to the upside.”
Financial stability will be monitored… “Staff indicated that they would continue to monitor money market conditions closely as balance sheet reduction proceeds."
On corporate pricing… “Some participants also noted that, by some measures, firms' markups were still elevated and that a continued subdued expansion in aggregate demand would likely be needed to reduce remaining upward pressure on inflation."
On the SEP (Summary of Economic Projections)…"Several participants commented that the median of participants' assessments for the appropriate path of the federal funds rate in the Summary of Economic Projections, which tracked notably above market-based measures of policy rate expectations, underscored the Committee's strong commitment to returning inflation to its 2 percent goal".
Bottom Line: The Fed Minutes do not materially change my opinion given from our January 2nd report. Holding opinions unchanged on when to further reduce SPX, China, and other themes based on shared documents inside our January note.
This is a hawkish Fed Minutes report, but there will be regions where dips get bought and rallies get sold.
Be Safe,
Larry