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đď¸ Powell's Comments Backfire
[5 minutes to read] Plus: Do journalism and trading mix?
By Matthew Gutierrez and Shawn OâMalley
The spiciest part of yesterdayâs uneventful Fed meeting on interest rates?
Jerome Powell subbed in a new word to describe the economyâs growth rate, calling it âstrong,â which is, apparently, an improvement from âsolidâ â the word he used last time around đŞ
So, the economy is strong, not solid! Score one for the Bulls out there.
đ Celebrate by listening to the Beatlesâ new song. (Thatâs a sentence we never thought weâd write!)
â Matthew & Shawn
Hereâs todayâs rundown:
POP QUIZ
Today, we'll discuss the three biggest stories in markets:
Can journalism and trading blend?
Powellâs comments backfire
If the economy is great, why are Americans in a bad mood?
All this, and more, in just 5 minutes to read.
CHART OF THE DAY
*$90 billion of pandemic relief funds remain unused for k-12 schools â they must move quickly to spend it before expiry next year.
IN THE NEWS
đ Journalism Meets Trading in New Company
A new business model just dropped. The FT reports, âA group of veteran U.S. financial journalists is teaming up with investors to launch a trading firm thatâs designed to trade on market-moving news unearthed by its own investigative reporting.â
Wait, wait, wait: Maybe this isnât a new business model. This is just a hedge fund â analysts dig through publicly available information while periodically publishing their research, and traders execute based on these insights.
Itâs not an uncommon practice for hedge funds to hire journalists or those with sleuthing skills to uncover unique information about companies. Short sellers, like Hindenburg Research, infamously do this.
They find issues with companies that arenât broadly understood, bet against them, and unveil their findings so others realize whatâs wrong and drive the price down â to the short sellerâs profit.
But short sellers arenât, or shouldnât be, trading based on âmaterialâ information from inside sources. Instead, theyâre piecing together information that is, in theory, broadly available or at least accessible.
For example, observing parking lot traffic in front of Walmart to predict quarterly sales is legal, landing somewhere between audited financial statements (widely available) and illegal insider information.
You might describe this business model as hedge funds subsidizing journalism. But what about journalism that subsidizes stock trading?
Thatâs what Nathaniel Brooks Horowitz and writer Sam Koppelman are looking to do, which is the ânew business modelâ we described above. Itâs raising eyebrows across the financial world.
Theyâre calling it âthe first trading fund driven by a global publication.â
Why it matters:
The elephant in the room is when journalistic sourcing for trades becomes insider trading.
Journalism vs trading: Profiting from non-public corporate information is how newspapers & journalists make their money. They make public information that, in another context, could be considered insider info.
In other words, insider trading happens when you trade. Journalists shouldnât trade on insider info before itâs made public. Investment bankers and many others in the corporate & financial world face similar constraints.
A few concerns: If the company trades on insider info uncovered by its journalists before reporting it, it makes itself liable to insider trading allegations. And if it reports stories that prove incorrect and trades off those, it may be liable for market manipulation charges, among other legal hangups.
Beyond the issues with trading based on your reporting, another question arises around the journalistic integrity of its business.
Would you trust a company that trades on the stories it reports before you read them?
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đŹ Powellâs Comments Work Against Him
Being Chairman of the Federal Reserve is tough. As mentioned in the intro, Jerome Powellâs press conference was mostly uneventful. However, investors were so excited about no news of another rate hike and Powellâs implication that more hikes may be unnecessary that his comments worked against him.
Back to econ class: See, the Federal Reserve determines overnight borrowing rates in the economy, which, as a matter of policy, it adjusts upwards & downwards.
These rates are a baseline, and when they move higher (or lower), so does everything else â think savings account rates, mortgages, car loans, credit cards, etc.
But not everything is affected equally. For example, for much of this year, 2-year Treasury bond yields were more highly correlated with Fed policy than longer-dated 10- and 30-year Treasury bonds.
As yields on 2-year bonds jumped higher with Fed hikes, longer-dated ones inched ahead.
Why it matters:
One of the biggest stories in recent weeks, though, is that said longer-dated bonds (known as the âbackend of the curveâ in Wall Street lingo) have finally surged higher after over a year of rate hikes.
Why that has occurred is a contentious topic, but Powell cited this finally happening as a reason the Fed may no longer need to keep hiking overnight interest rates (at the âfront end of the curveâ), comparing higher long-term Treasury yields to rate hike substitutes.
The marketâs response? Let us paraphrase: âGreat news! The Fed is done hiking, so itâs a great time to buy bonds again, especially long-dated bonds!â
In other words, after Powellâs comments, financial conditions âloosened,â reversing some of the uptick in Treasury bond yields that Powell had said was helping fight inflation (making more rate hikes by the Fed less necessary.)
Stocks also surged, and the dollarâs value declined against other major currencies â more signs of looser financial conditions (bad for fighting inflation.)
Now, Wall Streeters are wondering whether Powell played himself, and with the rally in Treasury bond prices (and decline in yields), if the Fed will have to hike rates again after all.
Safe to say, Wall Street loves playing mind games with the Fed.
MORE HEADLINES
đ¤ Microsoftâs Copilot AI tool just launched, but what is it exactly?
đĄ The $1.8 billion verdict that could lower home prices
đ° Disney pays $8.6 billion to buy the rest of Hulu from Comcast
đ Friendsâ co-stars lead tributes to Matthew Perry after his death
đŹ The SEC subpoenas PayPal for its stablecoin
đ The worldâs first certified autonomous flying taxi â see it for yourself
đ The Economy is Strong, But Americans Arenât Thrilled
âEverything is amazing and nobody is happy.â â Comedian Louis C.K.
That kind of sums up the results from a recent Wall Street Journal survey, which found that 69% of respondents said the U.S. is headed in the wrong direction. President Bidenâs approval ratings have been around 40% or lower, and Americans donât feel more confident about the economy despite a few positive developments:
The job market continues to prove resilient.
Economic growth is evident (4.9% annual pace).
The stock market has bounced back in 2023 after a tough year.
Maybe inflation is to blame for the unease: Even though it has fallen sharply since the June 2022 peak (9.1% to 3.7%), many Americans still feel the effects of higher prices. (Ahem, nobody needs the reminder.)
Meanwhile, the University of Michigan sentiment index is around recession-like levels. Again, inflation could be the primary reason: 40% of respondents say they feel worse off, blaming inflation.
The Federal Reserve is trying to get that 3.7% figure down to 3%, then 2%, by raising interest rates and keeping them higher. Nearly everyone knows this, and yet sentiment remains quite negative.
Perception and reality: Sentiment this year has been more negative than youâd expect when weâre in a strong economy â with near-record-low unemployment.
Wages used to lag behind inflation, but that isnât the case anymore. Generally, workers get more paid time off and flexibility (remote or hybrid work), so job satisfaction is relatively high.
Plus, high housing and stock prices have lifted the median householdâs wealth after inflation by 37% between 2019 and 2022 â the largest in the history of the Fedâs survey.
Why it matters:
Well, really, the question is: Why is this happening?
Referred pain: Political divides play a role, as they usually do, as well as stress around the increasing pace of the news cycle. Hereâs WSJâs Greg Ip with some theories:
âI suspect a lot of pessimism about the economy is âreferred pain.â Just as one part of your body can hurt because of injury to another, pessimism about the economy may reflect dissatisfaction with the country as a whole.â
One could cite political conflicts, the pandemic, the border, mass shootings, crime, and the wars in Ukraine and the Middle East as reasons to be pessimistic about America and the economy.
But as the financial author Morgan Housel would say, thereâs the psychological idea that being pessimistic might make you sound or feel smarter. "For reasons I have never understood, people like to hear that the world is going to hell," historian Deirdre N. McCloskey said in 2016.
After all, Daniel Kahneman did win the Nobel Prize for showing that people respond stronger to loss than gain.
This is another example of how much of what happens in the marketplace traces back to human behavior.
QUICK POLL
Do you think a journalism & trading firm can work out?See our first news story up top for context |
Yesterday, we asked: How closely do you like to follow Jerome Powell and the Fedâs moves?
â 38% of readers said they follow âsomewhat closelyâ and 26% follow âvery closely.â
â Everyone else is a more casual observer, saying they ârarelyâ pay attention or do so âon occasion.â
TRIVIA ANSWER
See you next time!
That's it for today on We Study Markets!
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