Wall Street Dialogues

Wall Street Dialogues

Journalist: After five consecutive months on the rise, and breaking 22 consecutive records, the Stock Market is taking a break. It will last?

Gordon Gekko: Ought. Since November, the rest periods, which there were also, did not last long. Something always came up, a piece of news, that brought them back into action.

Q: This time it is disturbing news.

GG: Inflation rose in January. And he repeated it in February. That was bad news and it did not manage to sow fear or put a stop to the momentum. They didn’t change the FED’s vision either, by the way. That was the real reason why they did not take the path of increases.

Q: Do you think then that the rally will not stop, beyond this circumstantial step back that the Stock Market takes?

GG: I think that after a 25% advance in the S&P 500, which had no interruptions, what can be expected is some setback. But transcendental reasons are not needed for it to happen. And that’s what we’re seeing.

Q: The economy, once again, shows signs of extraordinary dynamism. Is it very good news that is so good that it ends up hurting?

GG: It is the resurrection of manufacturing activity, the last thing that was missing to throw a shovelful of dirt into the recession hypothesis. It’s good news, of course.

Q.: Unless the markets bet heavily on the FED’s rate cut.

GG: Better a healthy economy with stable interest rates than a troubled one that demands the ambulance of a quick rate cut. No matter how much enthusiasm the lowering of rates arouses in the short term.

Q: The manufacturing industry returns to growth after 16 months of continuous contraction, says the ISM PMI report. Prices also increase. This last line justifies the markets’ annoyance, doesn’t it?

GG: March is the third month in which the industry has grown, says the S&P Global PMI report. And in March it slows down compared to February, he adds. So there are divergences, but also a couple of coincidences to keep in mind. The expansion widens, and now also incorporates industrial activity. The economy, in the first quarter, will have grown at least 2%. Double what was estimated at the end of the year. We are at full employment and traveling faster than potential capacity.

Q.: The Atlanta FED, after these numbers, raised its real-time forecast from 2.3% to 2.8%.

GG: Let’s say that would be the ceiling. And we must also think about the recovery that is detected in China, which is the world leader in the field. It is clear that the economy does not need the FED to come to its aid. The second coincidence occurs in the pricing chapter. The two reports register greater pressures during pregnancy. If China tightens up, it will add its share to the commodities arc. Which is what we have been seeing since mid-February. Those are two credible points.

Q: This is where it gets complicated. Or not? We already had persistent inflation in services, and now inflation of physical goods returns?

GG: Inflation of physical goods, “softened” by taking quarterly moving averages, reached 19% in March 2022 and negative 3.5% in June 2023. Since September it has fluctuated around 0%. And yes, it is possible that it increases a little, but from there it becomes a drama, that is not the case. The FED seeks stable prices (that is, they grow at 2% annually). Could this dynamic encourage an increase in the price of services? Nothing suggests it. The markets can see a problem here; the FED, very hardly. This is proven by its zero reaction to the two-month price jump.

Q.: The chances of a rate cut in June, according to Chicago futures, are already a coin in the air.

GG: There is no reason to rush. Powell said it and everyone says it. In December there was a fear: that the economy would weaken quickly. Fortunately, it didn’t happen. Should it be a hurdle for Wall Street? The rate increase (from October 2022) was not. The FED has not touched rates since July of last year and the rally since November was flat. In January, the markets anticipated six or seven rate cuts and then halved them, and gained enthusiasm. Delaying the sales process is a good excuse to shake the branches, and a very bad excuse to knock down the tree.

Q: Could it happen that the FED has to raise rates to calm things down?

GG: Nothing is impossible. But, what is likely is that the rise in long rates will do that job. They climbed 20 base points. Nothing tremendous. Look, as long as gold continues to rise, no one here is seriously worried.

Source: Ambito

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