Is Fed is being bold or simply stupid?

Abraham George Macro View

The Fed is showing no concerns. They are more than willing to hold their line while an unimaginably huge fiscal spending will find its way into the markets. Currently they are not at all worried that troubling inflation could be ahead of us. But the markets are thinking otherwise.

To use an analogy from ice hockey quoted by the great Walter Gretzky, “skate to where the puck is going, not where it has been.” The Fed is targeting 6.5% growth this year, with 4.5% unemployment. That is almost three times 2019 growth. In Fed’s eyes that is full employment. However they see inflation at a very tame 2.4%. It all sounds very magical. This sets up a scenario of risk assets going up and stocks hitting new record highs.

What is interesting is Gold went up and dollar went down. Is it a sign that markets are seeing through the Fed’s messaging? Too early to tell. What is for sure the markets will continue to test the Fed through the bond markets. That will tighten financial conditions, threaten a slowdown of the economy and force the Fed to act - likely something similar to the “operation twist” program that we discussed before.

Equities

Signs of a top formation are showing up but it is not very clear. Based on wave principles, we can see a triangle formation in the Dow. Triangles normally show up in the 4th wave. So how far the fifth wave will extend is something we are not sure. If the Dow retraces a small five wave decline, one can prepare for a top. Until then the pressure is more to the upside. In the S&P 4000 to 4010 should provide significant resistance.

Bonds

It shouldn’t be a surprise as bonds continue to pressure on the downside. The next downside target is around 152^25. Resistances are still in the area of 158^30 to 161.00.

Euro

A rally above 1.1992 will force us to abandon the downside levels that we were targeting before.

Gold

The countertrend rally that we have been alluding to since the last few days has reached 1752. It can still rise to 1760 to 1770. Once this correction is over, think we can continue to look for more lower levels.

Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.