Wells Fargo's Schumacher: Market backdrop became 'too sanguine, too quickly'

Summary

• Mike Schumacher argues the market backdrop has become "too sanguine, too quickly," with a disconnect between asset class recoveries post-recent sell-off.
• Equities recouped approximately two-thirds of losses, bonds one-third, oil one-third, and volatility three-quarters, indicating premature all-clear signals.
• Fed minutes were interpreted as dovish, leaning towards potential rate cuts down the road rather than hikes, despite inflation being higher now than three weeks ago.
• A Fed rate hike is seen as incredibly unlikely, with policy focus on job market weakness, as shown by secondary indices like quits rate.
• Elevated mortgage rates pose a risk to the economy, but Fed intervention via operations like Twist is unlikely due to balance sheet discomfort and upcoming leadership transition.
• The administration could theoretically adjust long-term debt issuance to influence rates, but this faces practical and political hurdles.
• Schumacher implies that volatility (market insurance) is underpriced and should be higher given the uncertain macro environment.
• Overall, caution is warranted as market optimism may be overstated, with key risks including upcoming CPI data and economic sensitivity to mortgage rates.