It does not matter what the Fed does with the Fed Funds Rate at this point, the global economy is softening and is likely to get worse. Whether the Fed ultimately takes rates to 3.5% or 4.0% will have little effect on the macroeconomic backdrop (QT is a different story).
- More job cuts. Large Tech companies such as Alphabet (GOOG), Amazon (AMZN), Apple (AAPL), Meta Platforms (META), NVIDIA (NVDA), and more have experienced softness and/or have taken a cautious stance with regard to the outlook for the remainder of the year. With broad economic weakness and high inflation in Western Europe, war in Eastern Europe and economic softness in China, Global CEOs and CFOs will be cutting jobs, not adding them. Job cuts will lead to less demand – not just within consumer businesses such as Gaming, but also in Enterprise-focused businesses that have ties to the consumer (Advertising for example where we have already witnessed weakness across a number of companies). Even enterprise growth areas such as data center/ cloud server businesses will experience softness given that the companies and applications that sit on top of Azure, AWS and GCP will experience slowness for multiple quarters. This economic slowness will be a multiple quarter phenomenon.
- Our bet is that the Fed will NOT pull the trigger on QT. If the Fed were to execute its original QT plan it would quickly shrink the money supply which is precisely the mistake the Fed made that led to the Great Depression. When consumers were making a run on the banks the Fed was shrinking the money supply – exactly the wrong strategy at precisely the wrong time.
- Continued stagflation. The U.S. will be stuck in this current stagflationary environment marked by muted growth (if growth at all for some companies), and escalating costs – both in terms of COGS and OpEx as elevated prices are here to stay. Sure, headline CPI may tick down due to the decline in the price of oil, but elevated Core CPI plus continued increases in food prices will cramp consumer spending as well as corporate profit margins.
- USD. Further, the USD’s strength versus other currencies does not make life easy for international markets that transact in the USD.
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