February 1, 2023
Good morning,
Monday’s market action started the week on a down note with the S&P 500 Index (SPX) down -1.31% on the day. Was it to be the start of a pullback? No, the market wouldn’t stand for that and retraced more than all of Monday’s losses by finishing up +1..46% yesterday. It was a poetic end to a month where “Markets will do what fools the most” is more of an axiom than an adage. Back in November, it was the rare strategist who was not forecasting a rough start to the new year. Here is the rough start from Addepar:
There seems to be no doubt about today’s downshift in Fed policy. Market expectations (Interest rate futures) are 98% confident of a 25 basis-point (.25%) hike announcement this afternoon. Since this is not Alan Greenspan’s fool-the-most Fed but is Jerome Powell’s fool-no-one Fed, there is virtually no doubt about the magnitude of today’s rate hike. Investors will instead focus on Powell’s press conference. There, he is unlikely to pre-commit to pausing after March 22nd’s rate hike (next Fed meeting and 84% probability of another 25bp hike according to March futures) ahead of an important payrolls report this Friday, which includes annual benchmark revisions and updated seasonal adjustment factors for payrolls and new population controls in the household survey. In other words, he is unlikely to define the end of the tightening cycle today (pivot).
The bond market is running well ahead of the Fed in the middle-to-longer maturities but is not yet there on the short end. Meaning rates on bonds longer than 2yr’s are lower than the Fed would like. Recent asset appreciation in stocks and bonds do not help the Fed’s goal of bring down inflation. It stands to reason then that the Fed Chair’s tone will push back a little on the markets and we could see market rates move back to where they were a month ago – a.k.a. a little higher.
There will be no Morning Note on Friday – I’m taking a personal day for our First Date Anniversary – it was a game-changer for us both, and is our most celebrated anniversary of the year. See you Monday.
Be well,
Mike