The opinions expressed below are my own and do not necessarily represent those of Visdom Investment Group, LLC.
Unanimous
The Fed hiked rates 25 bips, as expected, and the vote was 12-0. The S&P 500 was up about 20 points at the time and only jiggled around a bit with the release of the FOMC statement. The released Dot-plot caused a bit of a stir initially too. The median rate path appears about 50 bips higher now than from the Committee’s June expectations. Perhaps this hawkish shift surprised the market but didn’t immediately affect the S&P. Later on in the session, after other major markets started to move, the S&P fell down significantly.
The Treasury impact was a bit more complicated. The short end yields rallied on the release of the Statement and the Dot-plot and *continued* climbing during the press conference. The long end actually dropped a bit on the release and backed up some during the presser. In a nutshell, the yield curve flattened initially but unwound that flattening through the rest of the day.
One place to look for a better market signal was actually the currency market. The Dollar strengthened immediately on the releases from the Fed and continued to strengthen during the press conference. The Dollar kept strengthening through the close. For a clear market interpretation, the FX market tells us the story. The Fed surprised *hawkishly,* even if today’s specific hike was already baked in.
One surprising detail today. The capital flow was light at 90%. Considering the significance of today’s Fed decision, I’m baffled that more capital didn’t trade. We learned a lot today and in my mind, that merits taking action in the market. Oh well. This isn’t the first time the market has me scratching my head.
Here’s the bottom line. The investing landscape just changed. The Fed is starting a *hiking cycle.* The bond market believes that the Fed will drop inflation eventually. The FX market expects a stronger Dollar. The stock market is just starting to figure out what to think.
I don’t believe the stock market fully gets it yet. We’re beginning a stretch where macro forces will be *bearish.* Throw in the fact that we’ve just broken below the 50-day moving average (7611) and we’re about to test the 100-day moving average (7511) and you’ve got a situation that’s good for the shorts and bad for the longs.
Last observation and thought. The yields on the back end of the curve climbed *significantly* shortly after the Fed statement and dot-plot released. The 2-year yield started climbing and kept climbing the whole time but the 10-year and 30-year yields dropped and then *reversed* huge. This is weird. Especially if the market thinks the Fed will bring down inflation.
So here’s my best guess: term premiums. The 2-year is 4.73% right now and it’s not farfetched to see them at 5% soon. One cannot hold 10-year and 30-year debt, even with falling inflation premiums, if the front-end compensates you that much. I do not see the back end dropping during this coming hiking cycle, *even though that’s what the Fed and the market wants.*
So what’s that going to mean to stocks? It ain’t bullish.
See you tomorrow.
-Mike
Visdom Market Commentary
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