This “bad news is good news” trade that has persisted over the past 2-3 weeks is nonsense. Ask yourself: “what is coming next”?
- Earnings: On the earnings front, 2022 and 2023 Revenue and EPS estimates are coming down later this month.
- Within the Technology sector, investors will see the impact of this with soft Ad Revenue numbers, soft Consulting Revenue, and discretionary software categories that are levered to the broader economy such as CRM and HRMS where bookings rates will slow over 2H 2022.
- Macro: On the macro front, there will be immense political pressure on the Fed to continue to tighten at a similar pace if the CPI print comes in around 8.5% (we believe 9.0% is likely).
- We believe the Fed will hike by 100 basis points (1%) at its next FOMC meeting (July 26th and 27th), if the June CPI comes in above the 8.7% consensus.
- The Fed’s slow QT ramp is only making inflation worse. We believe QT (i.e. shrinking the money supply), is a far more effective tool for cooling the economy than arbitrarily lifting interest rates. Once implemented, bond yields will begin to march higher driven by the market, not some arbitrary rate set by the Fed.
The Fed made its own bed, doubling down on its printing in 2020 and 2021, thus it is difficult to have sympathy for Fed Chair Powell who in our view is the worst Fed Chair in history for not only allowing inflation to persist in 2021 and 2022, but for adding fuel to the fire with nonsensical monetary policy at an unprecedented scale.