Fed: We’re Not Finished Hiking

Let's start with a quick quote from yesterday's missive: "From mine, Powell will deliver a hawkish tone leaving the door wide open for further hikes in November or December if needed". That's exactly what he said. From my lens, Powell sounded hawkish today - reminding investors they are are not done hiking. Not yet. And if I'm to be blunt - he has sounded hawkish at every meeting this year. But investors will often choose to hear what they want to hear. Be conscious of what biases you have. The script is higher for longer and the market is yet to adjust. It will.

Fed Trying to Thread a Narrow Needle

Tomorrow we will hear from the Fed. It's very unlikely the world's most influential central bank will raise rates this month. However, it's my view Jay Powell is not about to drop any dovish hints. Remember: just because they may be closer to the end of rate hikes - that doesn't mean they are about to cut. Rate cuts are dovish. However, rates staying higher for longer is hawkish. And as inflation comes down, this means real rates are rising (with the Fed on hold). From mine, we hear a hawkish Fed tomorrow. And the market has not priced that in.

History Lessons 

History offers us valuable lessons. During the week, I read an interesting Bloomberg article citing research from financial historian Paul Schmelzing. He explained at a Jefferies (Hong Kong) forum that it’s effectively impossible for data from recent decades to offer insight into whether there’ll be a lasting impact on borrowing costs from the pandemic. This is interesting as the popular narrative is rates will remain high for a very long time.... but will they?

Where Do We Go From Here?

Major averages pulled back this week on fears rates could remain higher for longer. Makes sense - with the US 10-year above 4.25% - that's a reasonable assumption. But here's the thing: get used to it. Whilst rates might feel 'tighter'... rates are still not historically high. Not even close. What was not normal was rates being artificially suppressed to near zero for 15 years. And that might prove to be a difficult adjustment for some people. So where to from here? The honest answer is none of us know. What follows are some of the assumptions being made; and perhaps gaps in the market's thinking... it starts by asking quality questions.

Have Jobs Slowed Enough for the Fed to Pause?

Last week offered plenty of macro data for traders (and the Fed) to consider. Core PCE remains stubbornly higher at 4.2% YoY - moving higher month on month. However, there is signs of a slowing labor force - with job additions missing expectations. The question is whether the jobs market is now slowing enough for the Fed to end rate hikes? For example, total unemployment is very strong at 3.8% and there are almost 9M open jobs. That's not a weak labor market...

One Trend That Isn’t Sustainable

More "bad news is good news" hit the tape today... The monthly ADP private jobs number came in far weaker than expected. I say 'good news' as it potentially means less Fed (or at least that's the assumption). Here's CNBC: "Job creation in the United States slowed more than expected in August, according to ADP, a sign that the surprisingly resilient U.S. economy might be starting to ease under pressure from higher interest rates"

For Now… Bad News is Good News

August has proven to be a bumpy month for equities. And if the Trader's Almanac is any guide - it's not surprising. August and September are typically weaker months for stocks. For example, over the past decade, the S&P 500 has managed an average gain of 0.1% for August. Dismal. If you go back two decades, it becomes an average loss of 0.1%. Why? Maybe it's due to most of Wall Street taking summer vacation in The Hamptons - meaning trading volumes are low. Or it could be some traders locking in profits ahead of September - which boasts the worst record of any month in the calendar. For example, the S&P 500 has lost an average of 1% each September over the past 10 years.

“Navigating by the Stars Under Cloudy Skies”

Today Fed Chair Jay Powell offered his latest sentiment on the economy and monetary policy from the Jackson Hole Summit. Whilst he leant hawkish (my expectation) - he also admitted he doesn't know what's ahead. Nothing wrong with that... better decision making starts by first recognizing what we don't (or can't) know. Powell stated "... as is often the case, we are navigating by the stars under cloudy skies". Question is - what does that mean for markets and rates ahead?

Beware the “Bear Steepening” of the Curve

My last post talked about how the market is now taking its cues from bond yields (less so the Fed) Don't get me wrong... what the Fed does (or says) matters. We will hear more from Chair Jay Powell at the end of the week. Expect hawkish tones. To recap on what I shared earlier this week - globally long-term bond yields trade at their highest levels in 15 years. However, what's interesting is the shorter-end (e.g. 2-year and below) is not keeping pace. This has net the effect of "steepening" the all-important 10/2 yield curve. Question is - will that be a problem? History may offer some clues.

Now less about the Fed… It’s about Bond Yields

In ~11 years writing this blog - I've never seen a move in bond markets like the past 24 months. 10-year yields traded below 0.5% not that long ago. Money was next to free. Now that instrument will return 4.25% risk free. The 12-month T-Bill is a very attractive 5.34%. But it's not just in the US - it's global. Germany, Australia, Japan and the UK... yields on major fixed-income benchmarks are moving higher. In the UK, the 10-year gilt is yielding its most in 15 years. For me, where the market goes is more about bond yields than what the Fed do next...

“Big Short” Investor Goes Short… But Not on Housing

45 days after the end of every quarter - Wall Street's top fund managers are required to report their most recent holdings. These filings are known as 13Fs - and they reveal a lot about where the 'smart' money is going. Whilst there was nothing too out of the ordinary - a particular trade from Big Short investor - Michael Burry - caught my eye. He took a $1.6B short bet against the SPY and QQQ (in aggregate) using Put Options. Let's explore why he could have made that bet.... and he's not alone

The One Chart that Matters Most

If you were asked what is the most important metric in global finance - what would you answer be? The S&P 500? The US Dollar? Gold Something else? My answer is the US 10-year yield. Everything in finance is a function of this asset. For those less familiar with the game of asset speculation - this is a very important concept to understand. What's more, its importance extends well beyond the stock market. To begin, the US 10-year yield is the proxy for financial instruments such as your mortgage, your car loan, student debt, your credit card etc. More than that - how this bond trades also signals investor confidence.