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Our View
Interest rates are on the rise. Or at least, that’s the expectation. To quickly recap the last four weeks, the January jobs report came in stunningly hot (more than double economists’ expectations). Then the CPI, PPI and PCE reports all came in hot.
In other words, inflation is not dying down the way the Fed had hoped.
At the start of the year, the assumption was that the Fed would do two 25 basis point hikes, pause, and then cut rates by year-end.
That’s no longer the case.
By June, the Fed Funds Futures market is pricing in 75 basis points worth of increases from today’s levels (to a range of 5% to 5.25%). A month ago, that expectation stood at just 3.7%. Now it’s the base case.
By year-end, the market expects rates to be unchanged from the June levels.
In other words, hike into the summer and then no rate cut. A month ago, expectations for this scenario stood at just 0.3%. Expectations also called for rates at year-end to be at the same level that they are today (at 4.5% to 4.75%).
“Higher for longer” may not pan out. I think it will, because inflation is proving to be quite stubborn and the US consumer continues to spend rather freely. If it does pan out and the Fed is forced to go higher than the market previously thought and hold there for longer, then that’s a notable market headwind.
Our Lean
Yesterday, Our Lean was to fade the early strength, with a keen eye on 4020 to 4030. Monday’s high for the ES? 4024.75. Remember the old bear-market rule of, “markets tend to rally early in the week.” That’s why we said yesterday that we are “a little leary as to chasing such a big move [rally].”
In any regard, it’s the last day of February, so you can expect some big MIM flow on the close. According to my friend Jeff Hirsch at Stock Trader’s Almanac, the last day of February doesn’t tend to be very good. Specifically: