The Market: Rate Hikes Cometh. BTFD
"H4L Rates and Stocks" monetary policy comes into full view with today's objectively hot CPI report.
Discussion
As discussed in the post below, FED Chair Powell has been reiterated with force that the Fed would “use its tools” to keep economic growth and the labor market strong while bringing inflation back to target. Those “tools” are straight forward: higher-for-longer (H4L) interest rates and stock prices. H4L rates keep a lid on realized inflation and inflation expectations while elevated stock prices keep economic growth and the labor market strong. This “H4L Rates and Stocks” monetary policy comes into full view with today’s objectively hot CPI report.
H4L Rates
Today’s CPI report was unequivocally hot, with YoY Supercore CPI moving up to 4.8%. And now inflation swaps are starting to move back up to their 9/30/2021 pre-FED tightening levels.
The Fed will restart rate hikes at the December FOMC meeting, that much is clear. But…mind the gap.
H4L Stocks
As discussed yesterday, a gap between “rate cut hope” and “rate hike reality” will persist until the commodity market starts moving decisively higher, as defined by the Bloomberg Commodity Index (BCOM) 200-day moving average moving into a persistent uptrend. Currently, the BCOM 200dma is in a downtrend.
The “hope vs. reality” gap combined with the Yellen/Brainard, liquidity, fiscal stimulus, and AI “puts” will remain supportive of equities until Election Day. The extent of the upside will be determined by how quickly the “hope vs. reality” gap closes.
The OIS market currently has Fed Funds over 480 bps in January 2025, implying two 25 bps cuts between now and then. I believe the effective Fed Funds rate will be 583 bps by next January (i.e. FED hikes 25 at the December FOMC and another 25 at the January/February FOMC), which means there’s another 100 bps to go to close the gap.
The FEDeral Government Put
The S&P 500 should be down 3-5% right now as I type at 10:43am EST. It’s down 71 bps and IG CDX has barely budged, up less than 100 bps on the day and sitting well below the 54 level seen at last Thursday’s SPX low.
This is the FEDeral Government Put at work in real time.
BTFD.