September 21, 2022
Good morning,
It is finally Fed Day and in a few hours (~2:15 pm EDT), the Federal Reserve will have told us by how much it is raising interest rates and will have hopefully provided a much clearer picture on how long it expects to keep rates high. Risk of recession will likely be the number one question new agencies ask in the all-important press conference following the announcement. It could be momentously important if the Fed deviates from what is already priced into the market. All of this follows yesterday’s bond market selloff for the ages. It is very unusual for such a move in bond-land only hours before a big FOMC meeting.
With no headlines of it this morning, it would be easy to miss the bond market move. To mark your card, the market’s estimate of the terminal or peak fed funds rate has now reached 4.5%, to be reached in March next year; the 10-year real yield has breached the high set before the “Powell Pivot” at the end of 2018, and now stands at 1.16%, its highest in 11 years; the 10-year yield has broken the 3.5% barrier for the first time since 2011 and sits at 3.56%; and the dollar index is back within a whisker of its 20-year high set earlier this month. All of this after the Wall Street Journal, perceived as being used as the Fed’s messenger in recent months, ran a story predicting that a 75 basis-point rate hike was more likely than a “jumbo” 100 basis points.
At the last Fed meeting in July, markets (stock and bond) underestimated the Fed’s resolve to rein in inflation which led to a 10% rally on the S&P 500 Index. A month later, in his Jackson Hole speech, the Fed Chair left no room for markets to underestimate the will of the Fed to fight inflation – the S&P 500 Index has declined -11% since then. Given yesterday’s momentous move in bonds, maybe the market is properly discounting the Fed’s future moves now. I suspect so. We should have a pretty good sense of that by EOD today.
Be well,
Mike