Wednesday, March 2, 2022

Morning Note: Question now is .25 or .50%?

In Monday's morning note we featured data showing that fed funds futures were, in the face of intense global angst, still pricing in a zero chance that the Fed will not raise its benchmark rate at its upcoming meeting.

Well, as of yesterday, futures actually did price in a global-angst-induced 10% chance of no hike this month. 

As of this morning, however, we're back to zero odds.

I suspect the following bullet points from Fed Governor James Bullard's discussion in a virtual event this morning has something to do with today's move back to more hawkish pricing:

  • “This situation calls for rapid withdrawal of policy accommodation in order to preserve the best chance for a long and durable expansion”
  • Says U.S. economy doing better in terms of inflation-adjusted consumption than it would have been without the pandemic, pointing to the trend line drawn from 2011
  • Real economy has more than fully recovered from the pandemic recession
  • “The FOMC must now follow through with policy rate increases and balance sheet runoff or risk squandering policy credibility”
  • “The FOMC may have to move more aggressively going forward if inflation increases or does not moderate as much as expected”
  • Says Fed policy settings are “putting upward pressure on inflation, exacerbating the inflation problem”
  • Notes developments in the Russia-Ukraine war will have to be monitored closely but will likely impact Europe more directly than the U.S. He says global energy markets will be impacted over the short-to-medium term, which may lead to increased U.S. production of oil and natural gas
  • Bullard says inflation “has surprised substantially to the upside”

We'll see if Fed Chair Jerome Powell attempts to walk any of this back during his two-day talk with Congress (occurring as I type). Although, while he may walk back Bullard's aggressive (relative to what we're used to from the Fed) tone, we don't expect him to leave any ambiguity with regard to a rate hike this month (one's coming). The market's attention will be on clues as to whether it'll be .25% or .50%. Strong hints at the former will likely see stocks higher today...

We'll keep this morning's note brief. I'll circle back a little later with a charting update. We're scoring our equity market conditions index  (a monthly exercise) today as well; I'll share those findings in tomorrow's morning note.

Asian equities struggled overnight, with 12 of the 16 markets we track closing lower.

Europe's catching a bit of a bid this morning, with 12 of the 19 bourses we follow in the green as I type.

US equities are (save for the Nasdaq) mostly higher to start the session: Dow up 225 points (0.68%), SP500 up 0.57%, SP500 Equal Weight up 0.91%, Nasdaq 100 down 0.30%, Nasdaq Comp down 0.28%, Russell 2000 up 1.04%.

The VIX sits at 32.64, down 2.04%.

Oil futures are up 4.71%, gold's down 0.56%, silver's down 1.19%, copper futures are up 0.95% and the ag complex (DBA) is up 0.61%.

The 10-year treasury is down (yield up) and the dollar is up 0.18%.

Among our 38 core positions (excluding cash and short-term bond ETF), 27 -- led by PARA (formerly Viacom), energy stocks, metals miners, Nokia and base metals futures -- are in the green so far this morning. The losers are being led lower by solar stocks, carbon credits, silver, gold and wind stocks.

"Bubbles are wonderful things, but they burst. Working out how and why they burst is more a job for the psychologist than the investor. There does come a stage in any bubble when capital begins to get diverted to somewhere else. The smart money is often early, but it departs..."
--Russell Napier. The Asian Financial Crisis 1995–98

Have a great day!

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