Daily Comment (August 17, 2023)

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Good morning! Today’s Comment will cover three key themes: what the latest FOMC meeting minutes could mean for monetary policy going forward, an update on the latest complaints regarding artificial intelligence, and why the upcoming Argentine election in October has investors on edge.

Is the Fed Done? The hawkish Fed minutes weighed on market sentiment as investors pulled back on bets of a Fed pause.

  • The minutes of the Federal Open Market Committee’s (FOMC) July 25-26 meeting revealed that most members believed that there was a significant upside risk to inflation, which could warrant additional rate hikes. This hawkish tone suggests that, despite the progress made in bringing down inflation, policymakers are not yet confident that inflation has peaked and are willing to take a more aggressive approach in tightening monetary policy. However, there were also a few more optimistic members of the FOMC. Two officials favored leaving rates unchanged or “could have supported such a proposal.” Although there were no dissenting votes, it is clear that not all policymakers are on the same page.
  • Investor sentiment soured following the release of the FOMC minutes, as the market could not rule out the possibility of a hard landing. The S&P 500 closed yesterday down nearly 0.8%, while the U.S. Dollar Index (DXY) rallied. Despite the disappointing news, investors did not severely change their rate expectations. The yield on the 10-year Treasury rose a paltry 5 basis points, and the CME FedWatch Tool’s expectation of a September hike increased only modestly from 10% to 12.5%. This suggests that investors still believe that the Fed is near the end of its hiking cycle.

  • Despite the market’s reaction, it is too soon to rule out another rate hike this year. As the chart above shows, the economy is projected to accelerate in the third quarter, making it difficult for the Fed to justify easing policy any time soon. This may explain why investors sold off after the report, as they may have wanted to lock in their gains from earlier this year. However, we will be paying close attention to Fed Chair Jerome Powell’s speech at Jackson Hole next week for any hints as to how the Fed is leaning. Our expectation is that Powell will likely keep his options open.

AI Presence Expanding: Generative artificial intelligence (AI) is receiving flak after author Jane Friedman found books generated by the technology that were claimed to have been written by her.

  • The ongoing dispute between Hollywood writers and actors is an example of how workers are concerned about the potential for technology to displace low-skill and middle-skill white-collar workers, particularly among young people. Without adequate regulations in place, the growing ubiquity of AI could lead to a knowledge gap and inequality in the workforce. As a result, we suspect that the technology will likely face increased scrutiny in the coming months as concerns about its disruptive potential enter the national conversation. Investors should be aware of the uncertain regulatory landscape for the technology and how this may impact company earnings in the future.

Argentina in the Spotlight:  The presidential front-runner in Argentina unveiled controversial proposals to overhaul the Argentine economy that have left many investors worried.

  • The rise of Javier Milei is a reminder of how volatile Latin American politics can be. The region has typically swung between left-wing and right-wing governments, each promising to bring about a better future. However, as the world moves towards regional blocs, we see the same volatility in foreign and trade policy. For example, Brazil’s relationship with China was very contentious before Lula took over the presidency, since former President Jair Bolsonaro had blamed China for the pandemic. As a result, investors should keep in mind that these blocs will be fluid, especially as the world moves away from globalization.

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