Tuesday, November 22, 2022

Morning Note: The Market's Thinking Doesn't Quite Jibe With the Fed's

In yesterday's note I casually offered up 5 reasons for bulls to be, well, bullish on equities right here, I then proceeded to turn each on its head to justify a bearish stance... With regard to the bull's narrative, clearly, the presently most telling aspect is the somewhat softer tone emerging from Fedheads of late.

Question then being, are traders prudent in bidding up stocks based on, for example, the Fed walking back its earlier threats to hike by .75% come December 14th?

Well, perhaps, but, thing is, while indeed Fed members are hinting that they'll go lighter on a meeting-by-meeting basis, they're at the same time suggesting that it'll be a longer (albeit slower) path to their ultimate rate destination. 

Bespoke Investment Group, in their note this morning, suggested that the market is proceeding in line with current Fed guidance:

"Throughout all of August, September, and the first half of October, the market was steadily raising its forecasts for policy rates, and not surprisingly, stocks were under pressure. In mid-October, though, the odds of a 75 bps hike at the December meeting peaked at 77% and have been steadily declining to less than 20% today. It’s no coincidence that during that same stretch, equities have rallied. It sounds pretty obvious, but as long as the market remains on the same page as the Fed or finds itself playing catch up to a less aggressively hawkish policy path, equities should benefit from a tailwind."

Well, I don't know that the market indeed "remains on the same page" with the Fed.

Again, the Fed, as articulated by the likes of governor Mester, suggests that there'll be no end in near-term site to rate hikes:

“I don’t think we’re anywhere near stopping,”
I mean, if "the market" includes (it does) those who trade in Fed funds futures, it's thinking the Fed is not only nearly done hiking, but that they'll be cutting rates come mid-year 2023:

Soooo, while the market may ultimately have it right -- particularly in the event of recession early next year, and particularly in terms of when the Fed may halt their hikes -- it's clearly not "on the same page" (in terms of guidance) with the Fed when it presumes that they'll be cutting by June of next year...


Asian equities leaned red overnight, with 10 of the 16 markets we track closing lower.

Europe's trading mostly lower as well so far this morning, with 7 of the 19 bourses we follow trading down as I type.

US stocks are mixed to start the session: Dow up 147 points (0.43%), SP500 up 0.20%, SP500 Equal Weight up 0.42%, Nasdaq 100 down 0.39%, Nasdaq Comp down 0.40%, Russell 2000 down 0.12%.

The VIX sits at 22.15, down 0.94%.

Oil futures are up 1.31%, gold's up 0.41%, silver's up 1.37%, copper futures are up 2.11% and the ag complex (DBA) is up 0.20%.

The 10-year treasury is up (yield down) and the dollar is down 0.32%.

Among our 36 core positions (excluding options hedges, cash and short-term bond ETF), 24 -- led by base metals miners, energy stocks, uranium miners, silver and utilities stocks -- are in the green so far this morning. The losers are being led lower by Brazil equities, Disney, Amazon, Albemarle and Vietnam equities.

Please forgive the shameless plug:
"The measure of one’s intellect is no match for one’s predisposition."

--Mazorra, Martin. Leaving Liberty?: Essays on Politics and Free-Market Thinking

Have a great day!