The opinions expressed below are my own and do not necessarily represent those of Visdom Investment Group, LLC.
No hike
The S&P traded weakly ahead of the FOMC decision, bottoming about 2 hours before the statement release and down almost 90 points at that low. It’s unclear why equities were offered this morning. At 2 PM, the statement released and the language change from the prior statement was trivial. The key items within the statement were that rates were being held and that the vote was 9-3, with the 3 dissenters wanting a hike. Equities rallied some on the statement and gave it back as they waited for the press conference. During the presser, the bulls took the index into the green. Towards the end, stocks sold. After the presser, they kept selling, likely due to the steepening of the Treasury curve.
Today was all about the Fed’s decision and the press conference.
The bond market reaction was mixed, with the short end coming in and the back end rising. This suggests that Treasuries have concerns over long-term inflation.
The stock market liked what it heard, at first. The stock market is much less sensitive to the inflation issue than the bond market. Stocks are more worried about the Fed stifling growth. The Fed didn’t impede growth today, and stocks breathed a bit easier. The pre-Warsh Fed viewed the current rate policy as slightly restrictive. If equities believe that remains valid, they won’t worry about a possible hike at the next meeting. This is because whatever broad inflation pressures we are currently experiencing will lessen between now and then.
So stocks worried about the Fed, today and only today. And they traded under the presumption that despite the current rates market pricing a September hike at ~60%, it will come down, to zero. That said, as the bond market buckled, stocks couldn’t resist the pressure.
Philosophically, it looks like the stock and bond markets disagree. Bonds worry about high, sticky inflation and assume that a non-hike today increases the chance of a hike later, or worse, runaway inflation. Stocks view the inflation glidepath as coming down and heading lower. If the inflation data does reflect that downward path, then the rate hike probabilities must drop, and concern about September, or later, is misplaced.
Time will tell which market is better handicapping the future. The next moments of truth will be inflation releases. Nonfarm payrolls will naturally get attention but the inflation data matters more for the foreseeable future.
See you tomorrow.
-Mike
Visdom Market Commentary
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