Another Hike, Another Fall.
Will there be a fakeout?
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Our View
The Fed delivered another 75 basis point hike. While Powell did say that the size of future rate hikes will likely decrease from here, he left a hawkish tone going forward. Specifically, he said we will need a restrictive environment for quite some time to bring inflation down. Additionally, he said rates will likely have to go higher than previously thought.
There are a lot of complaints about the Fed and I agree with most of them. But I will say this: Powell did do some needle-threading yesterday.
He did not thread the needle that jumpstarts a stock market rally, but that’s not what the Fed cares about. It wants to be able to slow down the rate hikes, but have investors take them seriously. That’s what yesterday’s meeting seemed to do.
As for the S&P 500, it did not take the news too well.
It fell 2.5% yesterday and closed at the low. It’s now down 3.6% for the week, while the ES is down 4.4% the week when accounting for this morning’s 0.75% decline.
In yesterday’s Our Lean I wrote: “Every rate hike has eventually been followed by a drop so far this year…what makes today different?”
There are times where the S&P can reverse the prior day’s Fed move. I don’t know that this is one of them, but the reaction certainly wasn’t good yesterday.
Our Lean — Danny’s Take
The Fed hiked yesterday, now the BoE raised rates by 75 basis points this morning too. We’re in a world of tightening that doesn’t seem to have an end in sight. Even though we’re in a seasonally strong time of the year — both annually and in regards to the election cycle — the markets are just being dogged.
I hate being bearish, but this is the reality.
The dollar is roaring this morning and bonds are puking. Both are correlated to equities in that sense, suggesting stocks will again be under pressure unless there’s some alleviation on one of those fronts.
Our Lean: