IT IS FED DAY...75 is Baked In....All About the Presser...Hawkish or Dovish Spin
Overnight equities are higher as Microsoft, Google and Texas Instruments came out with good earnings and a positive outlook....at one point S+P futures were up 45 points while the Nasdaq futures were up over 200... Those now stand at up 32 and up 161... Bonds have surprisingly had some good buying in 5 year futures, but ranges are muted until 2 PM today...
Powell... Will he be hawkish or dovish??... We set forth two scenarios as the 75 rate hike is baked in... Again if Powell is not going to be hawkish his window for that opportunity is limited... The economy is slowing down and while many will argue for a recession (Roubini is the most negative economist since Henry Kaufman), the jury is out...
Scenario 1... Powell is hawkish... Will not mention 2% inflation goal, which is absurd at this time with CPI over 9%, but we expect him to be determined to have inflation as his number one goal to fight... He will not limit himself to 50 in September and if he is not cornered he should avoid the discussion... The Fed put is dead for the short term... His biggest worry should be 10 years under 3%... That is a stimulant for housing as we push 2.80 and lower... But the irony is that the more aggressive the Fed gets, the more recession fears increase... The more that recession fears increase, the more inverted the curve becomes... The more inverted means lower 10 year yields... The lower 10 year yields means lower mortgage costs.. Then the cycle starts again...
Scenario 2...Powell is dovish... He references lower prices in energy and a slower economy... He tries to use the word transitory without defining it... Transitory has always been correct, it is just not a 3 month cycle, but more like 2 years.. One of our traders sent us an analysis of money supply and inflation this morning, according to that analysis, inflation should revert to the 3 handles by June 2023... We agree with the direction and have always said that money supply is an important part of the inflation scenario..
Outlook... Fade the first move after the presser.. The real moves will start in London time tomorrow and accelerate with GDP... If GDP was good tomorrow they would have not scheduled Yellen to talk about in a press conference tomorrow... They would have had Biden do the presser... But given it is Yellen we think it will be bad... And while the situation continues to get worse in Europe, we think the ECB will be lucky to get another 50-100 off before Europe sinks into severe recession... Putin is squeezing the gas pipeline and sentiment is awful... So no matter what Powell says or how he says it, we think the 2.71 line in the sand of 10 years will be broken by the end of the week... We would rather see higher rates, but as our teachers in trading over the years have always emphasized, markets will always go to where it hurts the most positions... So that would be significantly lower rates and a more inverted curve...