The opinions expressed below are my own and do not necessarily represent those of Visdom Investment Group, LLC.
Hike’s comin’
Futures were up modestly when CPI (+3.4% vs +3.4% est and +3.4% prior) printed. Inflation is not dropping. There were other subsets of the data that tell slightly different stories but nothing that would allow the Fed to watch and wait. Markets reacted immediately, but some also surprisingly. The probability of a Fed hike on Wednesday climbed to above 85%. This was not surprising. Yields on the front of the Treasury curve climbed. Not surprising. Yields on the back end fell. Surprising. Stock futures rallied further. Surprising.
Over the regular trading session, things didn’t change much. The S&P opened +70 points and stayed around there. The yield curve gave back a bit of its flattening but not all. The Dollar wandered around but didn’t go very far. Big tech and the AI stocks did well and led the market. Crude fell some. Capital flow was light again, 80%.
It looks like the back end of the Treasury curve is happy that the Fed will hike soon. I interpret this as the market coming to believe that the Fed will squash inflation so that long-term inflation premiums can compress. We still don’t know how bothered the Treasury market is by the huge US deficit. In time, I suppose.
The stock market surprisingly likes the coming hike too. Perhaps this comes from relief that the back end of Treasuries won’t come unhinged? Perhaps it is simply a dip-buying moment. The stock market obviously isn’t worried about the Fed applying brakes to the economy. Again, in time I suppose.
Anyway, the bottom line is that a hike is almost certainly coming Wednesday and the market doesn’t have to play the guessing game until then. It’s coming. Plan accordingly. The Fed Funds futures market has rates peaking in September of 2027. The cumulative total of priced hikes? 93 bips. That’s 3-4 hikes of 25 bips.
The bond market will certainly like that as far as inflation fighting goes. I don’t know if the stock market has thought it through though.
Have a great weekend, see you Monday.
-Mike
Visdom Market Commentary
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