Nice way to start what we perceive is the most important Fed meeting that Powell has presided over in his career... Our view differs from the consensus today as to what the Fed will do by only one aspect... He will not raise rates today, and may briefly talk about balance sheet reduction, but, while many agreed with us early on about an accelerating tapering to mid February, that no longer seems consensus... Powell will be Hawkish for him, but we think Dovish versus market expectations... The Fed will likely use some combination of Fed hikes and balance sheet reductions to achieve their LEAN against inflation, but will not be as aggressive as markets have laid out.. Their will be no "meeting moves at every meeting"... There will not be a 50 basis hike in March...but they will continue to first reduce accommodation and then actually tighten... The last thing Powell wants to do is send the equity market into bear territory. He has seen the massive volatility since the beginning of the year, and that is not good for business... He does not want to send the equity markets ,and possibly chance the economy,into a bear spin... No "Fire and Ice" in his view.. The Fed put will still be there for equities, but not for bonds..
So you have our view, now lets break down markets... We said on Monday that to expect a reversal of the equity sell offs that has plagued the markets... We called a "selling climax" Monday... Both Monday and Tuesday saw massive reversals from down to up by the end of the day... A reversal of what we saw last week from big up to down... If you wanted to see a massive move look at the chart of S+P or Nasdaq futures in the first hour of trading of the overnight session last night, up 62 S+P points in the first 48 minutes... Part of that was a reversal of Microsoft which went down big before reversing...S+P futures are up about 60 now with the Nasdaq up 260, both higher, but off their highs...
Rates... 10 years hit 1.79 overnight... We have been in a 1.70-1.80 range, we are at 1.79 right now... We expect that to break... It could go either way, but our bet is that the short base is back to neutral, so a break to higher yields is more likely... 10 years did hit 1.90 last week, that is only a trade away on Fed day...5 years, whose auction went well, have backed up 5 basis from the auction... And could test their last week high of 1.69, but we do not think that is likely unless we have misjudged the Fed Hawkish tea leaves... We expect the front end of the curve to adjust to a dovish higher rate regime... With pressure on the long end...hence our view is that 5/30 are in a range of 50-71.. So more likely to steepen...
Both Citi and Goldman were out this morning recommending to buy the equity market..we sent the BB version of the story out earlier...we are on Peter Oppenheimer's list so we read his executive summary... His view is that the market sell off has moved too fast... With month end only a few days away, the asset reallocation's for the month of January will highly favor equities over bonds...The Citi Quant team put out " the inflow signal into US equities is the strongest signal since US equities since March 2020 (the recent low) at 1.8 historical standard deviations"... They go on to say the January's month end re-balancing of the $ leads to big buy of US $ versus G10... Part of this is why we expect a risk on trade AFTER THE FED MEETING...more than likely starting in about 24 hours through the end of the month....
US junk bonds are headed for the biggest monthly loss since the onset of the pandemic in March 2020...but with the equity rally this am, CDX HY is 9 better and about 20 off their lows of earlier in the week... Munis have had their worst January start since before our Muni team was born,,,1980... While we do not like getting in front of a fast moving train, we recognize what we expected to see... An equity market that moved into corrective territory, but did not reach bear territory... Hopefully we will be correct
Market expectations for the Fed today have moved more dovish since the equity turmoil... Powell is so far behind the inflation curve , a hole he dug into himself...but we do not think he is aggressively going to go after the 7% CPI, but in reality, he , and other Fed governors, think inflation is transitory and they will only lean against inflation, not fight it... Announcement at 2 PM... Presser at 2.30...
Latest out of JPM...just hit our inbox "JPMORGAN: "S&P 500 drawdown of -11% is masking the severity of this sell-off .. not only in correction, it is already in bear market territory without a recession in sight." Sell-off is "overdone, at least in the short-term, and see a bullish setup .. going into today's FOMC .."
The "Plunge Protection Team" is real...we saw the Japanese Central bank come in and buy 600 Billion of equity ETF's... But there are other PPT's out there.