Tuesday, June 14, 2022

Morning Note: Does the Fed Still Have Feelings for Stocks?

In yesterday's note I placed less than 50/50 odds on the Fed raising its benchmark rate by .75% come tomorrow's wrap of their 2-day policy meeting. Well, the market says different.

The yellow outline below says that's precisely what Fed funds futures are pricing in.

Which, make no mistake, inspired the plunge yesterday that took stocks to levels that, as we've been explaining lately, inspired the sort of hedging action that added to the downward momentum.

Apparently, according to a complete 180 by the Wall Street Journal this week (one day they placed scant odds of a .75 hike, the next they're predicting .75 hikes in June and July), .75 is nearly a given. Clearly they have insight into what Fed voting members are considering among themselves.

A .75 move tomorrow will be clear evidence that the Fed has moved on. I.e., abandoning (for the moment, anyway) its support of the equity market in favor of seriously battling inflation. 

If, on the other hand, assuming the WSJ, and futures traders, indeed had an inside line on Fed-think (yesterday), and they now -- in the wake of yesterday's drubbing -- surprise with a .50 move, well, then that says they still have feelings 💖for the market.

Aside from equities, if recent trends in the credit markets persist, well, let's just say that Powell and Company can't be sleeping well these days. Our own "Financial Stress Index" -- which tracks yield curves, various spreads, lending sentiment, etc. -- says that the risk that they'll break something is rising too rapidly for comfort. 

The Producer Price Index for May was released this morning, inspiring a bounce in equities. It came in lower across each component on a year-on-year basis, but, alas, likely not to a consequential degree at this juncture...

Stay tuned...

Asian equities were mixed overnight, with half of the 16 markets we track closing higher.

Europe's leaning red so far this morning, with 11 of the 19 bourses we follow trading lower as I type.

US stocks are catching a bit of a bid to start the session: Dow up 133 points (0.44%), SP500 up 0.63%, SP500 Equal Weight up 0.79%, Nasdaq 100 up 0.84%, Nasdaq Comp up 0.77%, Russell 2000 up 0.46%.

The VIX sits at 32.59, down 4.20%.

Oil futures are up 1.97%, gold's down 0.27%, silver's down 0.05%, copper futures are down 0.33% and the ag complex (DBA) is down 0.23%.

The 10-year treasury is up (yield down) and the dollar is down 0.05%.

Among our 38 core positions (excluding cash and short-term bond ETF), 26 -- led by Nokia, energy stocks, Dutch Bros, Albemarle and MP Materials -- are in the green so far this morning. The losers are being led lower by uranium miners, Disney, gold, defense stocks and ag futures.

Unfortunately, while the following applies to policy, in the real world it too often applies to investing as well:
"...underlying trends become dominated by short-run shocks and policy responses. A related failing is that factors that dominate short-term forecasting are then given too large a role when it comes to constructing a long-term view."

Have a great day,


  1. Thanks Marty! The market correction is hard to watch, but it is long over due as you have been saying all along, "the Fed can't have it both ways". Cryptocurrency is in free fall. BlackRock saved the market last time. This time BlackRock did not buy because valuation in their opinion did not improve. I think you are absolutely right that the Fed will abandon the market and focus on fighting inflation. However, the Fed needs to creative and careful for not tipping the economy into a REAL recession. We are not at the level like 2008, 2018, or 2020. Let's see how this week plays out.

  2. You bet Sam. Tomorrow will be telling for sure. It's an opportunity for the Fed to make believers of those who still think its there to support asset prices over all else, or of those who believe there's no longer a Fed put under the market... I suspect it's a little bit of both; inflation virtually demands that they abandon their kneejerk support of markets, but that's tough given their DNA... And, as I suggested in the article, the credit market could become a serious systemic issue in an aggressive tightening campaign... Ultimately, given underlying credit market conditions (including sovereign debt levels and their respective durations), there's literally no chance Powell goes full-Volker -- not even close, when it's all said and done...