Last week, Darius joined Nicole Petallides on the TD Ameritrade Network to discuss market headwinds, tailwinds, inflation, and more.

In case you missed it, here are three takeaways from the interview you need to know: 

1) Asset Markets Face Three New Headwinds That Arose Over The Past Few Weeks

We have seen a lot of recent volatility in asset markets as they digest three new headwinds that arose over the past couple of weeks:

  • The Bank of Japan (BOJ) tweaked its Yield Curve Control (YCC) policy and will allow interest rates to rise more freely
  • The Treasury Department positively revised the number of treasuries that they will supply in Q3 from an estimated $733bn in May to $1.007 in August 
  • Fitch downgraded the US credit rating from AAA to AA+

2) We Believe The Existing Asset Market Tailwinds Will Push Stocks Higher Over The Next Quarter

In addition to the “Resilient US Economy” theme and the high likelihood that the immaculate disinflation trend will continue, two additional readings that came out last week contribute to our theory: 

  • Jobless claims, the number of people filing weekly to receive unemployment insurance due to not having a job, came in at 227k and well below its recession signaling threshold when analyzed on a three-month annualized basis
  • Continued claims, the number of people who have already filed an initial claim and who have experienced a week of unemployment and then filed a continued claim to claim benefits for that week of unemployment, came in at 1.7M and well below its recession signaling threshold when analyzed on a three-month annualized basis

Although a few of last week’s readings disprove the Transitory Goldilocks theme, specifically the ISM Services PMI coming in at 52.7, a 2-month low, and the ISM Services Prices PMI coming in at 56.8, a 3-month high, we believe the Transitory Goldilocks theme is likely to persist well into Q4.

3) The Return of Inflation Pressure Will Cause The “Risk On” Regime to Dissipate

The large amount of immaculate disinflation we have seen since Q4 of last year has been a key contributor to the Transitory Goldilocks theme and asset market performance.

Last week, we received incremental inflation data that supports further immaculate disinflation:

  • Unit Labor Costs came in at 1.6% QoQ annualized, the lowest number since Q4 of last year
  • The Median Annual Pay for Job Changers slowed 110 basis points to 10.2% YoY, the lowest number since July 2021

However, we expect the immaculate disinflation process will conclude within 3-6 months.

Any threat to the “immaculate disinflation” narrative threatens to unravel the “resilient US economy” narrative because market participants will start to come around to the view that the Fed needs to engineer a recession to achieve its price stability mandate. 

That’s a wrap! 

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