Frances Newton Stacy, director of strategy at Optimal, joins Cheddar News. 

Stocks Open Lower Ahead of FOMC Minutes

And joining us now to discuss is Frances Newton Stacy, Director of strategy at optimal capital Francis. Welcome to the show. Thanks again for joining us Now, the stock market is aiming for a rebound after five days of losses. What do you make of the volatility that we've seen so far this week? Well, the volatility is based on competitive narratives around the Fed. I mean, you have so many mixed signals in the market right now, you've got people who think that there's going to have to be a pivot regardless of what they say, because liquidity is starting to wane dramatically. And we've seen some liquidity, you know, some minor liquidity issues in the bond market. Then, of course, you've got the situation over in England. Um and at the same time, you've got Fed speakers being more hawkish than ever. So, anything that drives Fed News, the Minutes today C. P. I tomorrow, um you're gonna see these mixed narratives playing out and that's the volatility and earnings any mrs. Um you're gonna see downside volatility, obviously, or surprises to the upside, you're gonna see volatility. I think generally people are, you know, investors are expecting third quarter earnings to, you know, slow down guide lower because we're expecting a recession at this point, probably in recession. But so you could have surprises to the upside surprises is the downside and that all contributes to the volatility. Absolutely. Now, you mentioned some of this data that we've been looking at investors mulling over the producer price index, which did come in a little bit higher than economists were expecting in september showing? Of course that inflation is persisting. What did today's numbers tell us about the inflation picture ahead of tomorrow's consumer price index data. Well the thing about it is is that so it's interesting that the Fed is very focused on the C. P. I. In the labor market and particularly they've said now that there's focused more on the C. P. I. Than the core. And the thing about it is is there are so many lag effects, right? You know, energy is moving higher but that has a 1 to 2 month lag effect. Food prices have fallen off dramatically have reversed recently. Um You know, that has a 48 month lag effect before it shows up in the C. P. I. Calculation. And most importantly, owners equivalent rent accounts for about a third of the C. P. I. Reading. And that is remaining very sticky, very high because of the fact that housing has become very unaffordable with mortgage rates going so high. So if we're relying solely on C. P. I. Um for the Fed to give its trajectory on tightening, then we don't see cp I backing off any time soon the PP. I. Coming in, it's still decelerating. Um But it's just not decelerating fast enough to you know, kind of play into the pivot narrative. It's more playing into the hawkish narrative on the Feds. So that's what we're seeing now, given what we've seen with jobs, with producer price index, what could possibly come out tomorrow. What do you think? We will see from the Fed, given that they have been hawkish in their rhetoric. As you mentioned, I expect the hawkish rhetoric to completely continue. And the reason is, is that people are starting to really figure out. They can control the discount rate directly, but as far when it comes to the Fed funds rate those rates, they give a range and then those rates are traded. So financial conditions are traded by investors and traders. And the problem is, and we learned this in july when, you know, Powell sort of said, oh, we're a little data dependent, right? And the pivot trade started to really take off. If traders anticipate any kind of dovish turn from the Fed, they will loosen financial conditions for the Fed and that will undo what the Fed is trying to do. So the Fed really doesn't have a choice other than to remain resolutely hawkish. Even if, for instance, there, you know, reducing the balance sheet at a much lower than announced Pace, which would be a bit dovish right in their sentiment. Um, but they just they will remain resolutely hawkish. So you don't have traders um, preemptively pricing in some kind of a pivot. Really great, you know, explanation there Francis, let's talk about major banks because they're reporting earnings this week, As you had mentioned, what do the markets have baked in for quarter three earnings? Well, Q three earnings, you know, as I said, um were generally expected to have a rate of change lower year over year, we still see some earnings growth, but it's, you know, it's it's declining at the rate at which it's growing right quarter over quarter. You're seeing, you know, earnings start to contract. And with the earnings picture, it's like we know that the Fed is reducing liquidity in the system. We know that the Fed is trying to destroy demand and so I think that the markets will tolerate based on what they've already priced in. Some guidance lower, you know, earnings moving lower, profits moving lower. That said surprises to the upside will be violently re priced surprises to the downside will be violently re priced. And the one sector that is probably keeping us out of a profits recession is energy energy for the third quarter is is expected to have grown pretty dramatically. So we just have all of these um kind of coming into this tightening cycle on a lag effect. And so we're getting, we're in that iteration where we're getting very mixed signals from earnings in the markets as far as the big banks go. Yes, they're getting higher yields, but the loan volume is probably down pretty dramatically. So we'll just have to wait and see what comes in. Now, let's quickly look overseas. The bank of England is set to end its emergency bond buying program on friday. So what should U. S. Investors be watching and how might this impact to them. Okay, so England is just sort of ahead of us on the liquidity situation trajectory. And what's interesting is Andrew bailey is again, what I said with the Fed, he's remaining resolutely hawkish as far as ending those bond purchases. But there was an article that came out earlier this morning that said behind the scenes. Um you know, they think that the Bank of England is willing to still kind of prop up those markets. So again, he's not gonna say that directly because he doesn't want traders to anticipate that he wants traders to price what he's saying. Um but everybody knows that the plumbing in the system, it's unlikely for any of these Fed chairs to you know have a liquidity situation. To the point where you know, you have illiquid markets, trades are not settling the plumbing in the system is starting to break down to think that they won't accommodate, they just have in history to serve for the plumbing. And I would argue that if the plumbing breaks down in the system and you have liquidity issues that's actually much worse than inflation. So you start to see the Fed Chairman is resolutely hawkish and there are these whisperings in the background that this accommodation will remain if necessary Francis, thank you so much for joining us this morning and for those great breakdowns. We hope you'll join us again soon to talk about this. That's Frances Newton Stacy, director of strategy at optimal capital.