Daily Commentary

MarketMinder’s View: The common reaction to yesterday’s Fed meeting: Fed head Kevin Warsh’s credibility took a big hit because the Fed didn’t do or predict anything. “… Investors believe the Fed won’t act immediately on inflation readings that by Warsh’s account have been above the Fed’s 2% target for at least 63 months, and that it may have to act more aggressively later as the economy heats up for the long haul.” As the commentators quoted here indicate, because Warsh didn’t communicate “clearly or explicitly,” market participants don’t know what it would take for the Fed to hike even though the data supposedly indicate the central bank should—and as a result, “the bond market puked on him [Warsh].” That vivid, overwrought language aside, all this handwringing over Warsh’s words says more about central bank pundits and market analysts and their own personal (misperceived) views than anything about the new Fed head. To start, 10-year yields jumped all of six basis points Wednesday (per FactSet), which is not huge. The S&P 500 dropped 1.5% on the day but regained it Thursday (also FactSet). Moreover, this fixation on rate hikes because of the recent pickup in inflation is misguided, too, as it assumes certain categories (e.g., semiconductors and energy) drive higher prices across the economy. Wrong—inflation is a monetary phenomenon, so broad money supply growth matters more than how a handful of volatile price categories are faring. Contrary to the conventional wisdom, Fed hikes today would risk a mistake—as Fisher Investments founder and Executive Chairman Ken Fisher wrote in the New York Post this week, if the Fed and other central banks hike too aggressively, that could flatten or even invert the global yield curve, discouraging lending and weighing on growth. Don’t follow the crowd here, folks—hikes aren’t what the US economy needs right now. As for the credibility claims, what is more credible: Saying you will do X if Y happens and then changing your mind, as past Fed heads did, or remaining nimble to adjust to evolving conditions without having to U-turn?

MarketMinder’s View: This piece illustrates a useful but often overlooked concept for investors: A country’s economy isn’t its stock market. Take Germany and its famed Mittelstand. “The amorphous group of small and midsized enterprises, often family-owned, that are often world leaders in their niches make up the backbone of Germany’s postwar success.” As the article explains, these small businesses, from machinery companies to valve manufacturers, worry about their prospects looking ahead—especially compared with Chinese and US rivals. “The gloom was underlined by a recent survey by DZ Bank and industry bodies for co-operative banks. The investment appetite among German SMEs has fallen to its lowest level since the survey began in 1995—lower than during the financial crisis, the Covid-19 pandemic or the energy crisis following the start of the war in Ukraine.” Those findings are consistent with other surveys (e.g. purchasing managers’ indexes), and the dour takeaways frequently color perceptions of Germany—a reason many view it as the current “sick man of Europe.” As politicians mull ways to support the Mittelstand—many of which are covered here—we caution investors against using these specific domestic headwinds as reason to avoid German stocks. Germany’s main stock benchmarks (e.g., the DAX or MSCI Germany) feature much larger companies whose prospects depend more on global than local trends. For instance, Germany’s auto industry has faced several global headwinds in recent years, from falling demand in (and rising competition from) China to higher energy costs—those issues have less to do with German domestic policy than global trends. We don’t dismiss the issues facing Germany’s small businesses, but when it comes to investing, global generally swamps local.

MarketMinder’s View: After lots of speculation of “will they or won’t they,” Japanese authorities appeared to have intervened in currency markets again and bought a bunch of yen. “The yen surged against the dollar on Thursday, in a move so rapid and large in its scale that it alerted investors to the prospect of intervention by Japan to prop up its weak currency.” The experts interviewed here largely believe this is yet another yentervention, and one makes a key point: This action isn’t likely to lead to a stronger yen over the longer term. As Daisaku Ueno from Mitsubishi UFJ Morgan Stanley Securities notes, “Whether this will shift the trend toward a stronger yen remains doubtful. Speculation about a U.S. rate hike in September persists, alongside safe-haven dollar buying. While speculative yen depreciation might be temporarily curbed, real demand and investment-driven dollar buying—related to importers and the new NISA—will likely continue.” Past yen interventions have proven fleeting once market forces take back control, and we doubt this time is different. For more, see our commentary, “Pumping Up the Yen?”