The opinions expressed below are my own and do not necessarily represent those of Visdom Investment Group, LLC.
Equity breather.
Equity futures were a bit higher in the premarket and the S&P 500 opened about flat. The index rallied 5 points for the first 30 minutes and then gently rolled over, spending the rest of the day down some. US treasury yields fell, as did crude on the front-end. The Dollar weakened a bit and precious metals rallied a bit. Bitcoin lost more than a percent as well. Treasuries, crude, the Dollar, and precious metals all continued the peace-is-coming trade dynamic. US equities and Bitcoin did the opposite.
It is unclear why stocks (and Bitcoin) traded differently than the other markets today. Focusing only on stocks for the moment, maybe the last few sessions were perceived as an overshoot and today’s a bit of a correction? Maybe stock investors are de-risking slightly in front of the FOMC decision and press conference tomorrow?
I do not think that today’s stock market drop is terribly significant. Given that the cause is not obvious, we can chalk it up to inherent volatility and just move on.
The next significant leg up or down for stocks will be initiated by the message, or perceived message, of the Fed tomorrow. We already know that no policy change is expected. We also know that the market-implied hiking path is lessening. The market currently prices 21 bips of hikes through year end and peak rated in April ’27. A week ago, 25 bips of hiking were priced through year end and peak rates were September ’27.
The takeaway from the rates market is that the need to hike rates to combat inflation is already dropping. The steady drop in the price of crude *should* result in interest rates dropping. The Fed can stay officially neutral for a while and let the market bring down rates on its own. Prior to becoming Fed Chair, Kevin Warsh was perceived to be a dove. The current inflation situation is going to allow the Fed time to potentially return to a gentle easing cycle. After all, prior to the US/Iran attacks, the Fed’s view was that their interest rate policy was slightly restrictive.
If we are economically returning to pre-war conditions, it would make sense for the Fed to watch the data as it comes over the next few months, and then make a policy decision. If over the coming months, inflation is trending lower, it would make sense for an easing approach to either become stated policy, or at least a hinted bias.
So if everything goes according to plan, the Fed just needs to say the usual platitudes and let the market know it’s going to watch the data unfold. The market will do the rest. Which will be good for the longs.
So what’s Kevin Warsh and the Fed going to do? Answers come tomorrow at 2 PM.
See you then.
-Mike
Visdom Market Commentary
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