Stocks and Bonds Shrug Off Widely Anticipated Fed Hike
Stocks and Bonds Shrug Off Widely Anticipated Fed Hike
S&P 500 up +2.17% month-to-date
- The Federal Reserve hiked their main rate by 25-bps to 5.25-5.5%, as expected (100% chance, per CME’s FedWatch tool).
- What happens next? That depends entirely on the data.
- Markets haven’t been offered any compelling reason to change their current trajectory.
The Federal Reserve did what was widely anticipated, raising rates by 25-basis points (bps) to bring their main rate to 5.25%-5.5%. What happens next, however, is entirely data dependent, which is why it's too soon to officially announce that the rate hike cycle is finished.
While headline U.S. inflation has come down sharply over the past year, the easy part of the fight is finished. Base effects in the data will make further declines more difficult to achieve, while a turn higher in soft agriculture and energy commodities' prices will likely produce a bump in inflation rates in August and September.
Given the hit to the Fed's credibility in the wake of keeping rates too low for too long ("transitory"), it's likely that the Fed keeps rates higher for a sustained period, absent a recession, to avoid another inflation surge akin to the late-1970s. "Generals are always fighting the last war," as they say: we had excessive easing in the pandemic after not doing enough stimulus early on in the global financial crisis; now, we may see excessive tightening post-pandemic to offset excessive easing.
And yet, these aren't compelling reasons for U.S. equity markets to stop rallying or for the bond market to exit inversion territory. Much of Fed policy is simply a confidence game, insofar as markets don't care about incremental interest rate moves as long as it appears that the Fed has a sober, clear-eyed view of the economy.
/ZQ Fed Funds Futures Forward Curve (August 2023 to December 2025)
The /ZQ (Fed funds) term structure shows an expectation that the Fed may not raise rates again this year: there is effectively a 50-50 chance that another hike is levied by November. A lot can change between now and then; indeed, there are another 55 days until the September FOMC meeting.
For now, markets believe that the Fed has done a good job engineering a soft landing, so the latest rate hike - and another 25-bps rate hike later this year - will not dramatically alter traders' near-term outlook; only a dramatic fall off in U.S. economic data will provoke a reassessment. The trends in stocks and bonds remain your friends, for now.
Christopher Vecchio, CFA, tastylive’s head of futures and forex, has been trading for nearly 20 years. He has consulted with multi-national firms on FX hedging and lectured at Duke Law School on FX derivatives. Vecchio searches for high-convexity opportunities at the crossroads of macroeconomics and global politics. He hosts Futures Power Hour Monday-Friday and Let Me Explain on Tuesdays, and co-hosts Overtime, Monday-Thursday. @cvecchiofx
For live daily programming, market news and commentary, visit tastylive or the YouTube channels tastylive (for options traders), and tastyliveTrending for stocks, futures, forex & macro.
Trade with a better broker, open a tastytrade account today. tastylive, Inc. and tastytrade, Inc. are separate but affiliated companies.
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer. Options, futures, and futures options are not suitable for all investors. Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on tastytrade.com/disclosures.
tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.
tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.
tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.
© copyright 2013 - 2024 tastylive, Inc. All Rights Reserved. Applicable portions of the Terms of Use on tastylive.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastylive’s podcasts as necessary to view for personal use. tastylive was previously known as tastytrade, Inc. tastylive is a trademark/servicemark owned by tastylive, Inc.