Last week was a good week for markets. Fed minutes, Inflation data, and potential trade deals all gave reason for optimism. So, what is the Goldilocks Nightmare?

Goldilocks

A Goldilocks economy is a situation where growth is strong, but inflation remains subdued… an environment that allows the Federal Reserve Board (FRB) to consistently raise rates without ill effects on the economy.

In the fall of 2018, most central banks falsely thought we were in a Goldilocks situation. The FRB was talking about raising rates three times in 2019 and even referenced this as a goldilocks economy. The European Central Bank (ECB) closed out their bond repurchasing program late last year in hopes of starting increases to rates later this year.

All that came crashing down and the nightmare became a reality. Markets could no longer find the silver lining in the private sector as central banks continued to squeeze margins. As rates were increased, debt obligations went up month to month for corporations, diminishing earnings continually. The pinch left investors hitting the sell button.

Last Week

FRB minutes were released last week, and the view is much different than last year. Current projections show no hikes for 2019. That could change, should a trade deal be reached with China. The ECB has also made it known that it is willing to restart their Bond repurchasing program. That may take some time and campaigning to pull together support from member nations.

Inflation data came in at 2% year over year. A softening from last month by .2%. This should support continued growth. It should also give the FRB some runway before a hike is called for.

Conclusion

In all, the nightmare was that central banks were complacent to their effect on corporate earnings. Raising rates for a future need, while ignoring the strain being levied against corporate cashflows. This is not the fault of the FRB, but rather the dependence of Corporate America on FRB assistance.

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