June 15, 2022
Good morning,
Inflation readings over the past few days have come in higher than expected. The bond market’s reaction has been to discount a more aggressive arc of rate increases by the Fed at their next three meetings at least – today, July and September. Looking at Fed Funds futures, that market has priced in a 98%-ish probability of 75bps hikes today and next month, with a lower probability for the same in September. Last Thursday afternoon, 50bps rate hikes were a lock.
The stock market’s reaction to the bond market’s reaction has been another step down in valuation and in the process crush the probability that the recent rally was part of a bottoming process for the stock market. With lower lows in most major indexes, our 4-steps to a bottom process – oversold, rally, re-test, breadth thrusts – has to begin anew.
The central question for all markets now is, can the higher arc of rate increases tame inflation without crushing economies. A recession this year still looks unlikely. However, it seems no longer a question of if, but rather how deep will 2023’s recession go, that has become the prevailing narrative.
Be well,
Mike