Remember, The Fed Hasn’t Actually Done Anything Yet

When the financial markets got, um, choppy towards the end of 2018, the Fed caved almost instantly. But only rhetorically.

Fed chair Powell promised to stop raising interest rates and shrinking the money supply, and the financial markets, trained to salivate at the sound of Fed happy talk, immediately morphed from “risk-off” to “risk-on.” Stocks are now approaching last year’s all-time highs, bond prices are way up (which is to say long-term interest rates are way down) and the financial press is back to celebrating the “Goldilocks economy”.

But remember that as far as actual monetary policy goes, nothing has changed. Last year’s Fed Funds rate increases are still in place, while the Fed’s balance sheet remains diminished (which is to say the cash drained from the economy as the bonds in the Fed’s account were retired remains out of action). So the damage has not been undone, and it’s starting to bite. Some examples:

US retail sales are falling:

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source: tradingeconomics.com

Housing, which a year ago was in a mini-bubble, is rolling over. Housing starts are down…

(Click on image to enlarge)

source: tradingeconomics.com

… while existing home sales have cratered:

(Click on image to enlarge)

source: tradingeconomics.com

US manufacturing orders missed big in the most recent reporting month:

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Manufacturing orders permenant QE

Corporate earnings, meanwhile, are so weak that analysts are talking about an “earnings recession”:

(Click on image to enlarge)

From a February Zero Hedge article:

One week ago, when looking at the dramatic collapse in consensus Q1 EPS estimates, we noted that the “profit party” is over and the days of near record earnings growth are about to end with a bang as a result of the recent barrage in profit warnings and negative preannouncements, first and foremost starting with Apple, which issued a shocking guidance cut one month ago for the first time since 2001. As a result, analysts have slashed their S&P500 earnings estimates for the first quarter, and the Q1 bottom-up EPS estimate dropped by 4.1% (to $38.55 from $40.21) during this period.

All eleven sectors recorded a decline in their bottom-up EPS estimate during the first month of the quarter, led by Energy (-22.5%) and Information Technology (-7.3%). Overall, seven sectors recorded a larger decrease in their bottom-up EPS estimate relative to their 5-year average and their 10-year average for the first month of a quarter.

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