Sentiment whipsawed this morning as falling Fed rate hike expectations saved stocks from a yield-driven selloff. The Dow, S&P, and Nasdaq Composite opened flat before surging through noon despite an uptick in Treasury yields. The 10-year Treasury yield advanced to 4.30% shortly after the open and remained higher on the day following the market’s mid-morning rally.
A morning report from the Wall Street Journal revealed that several Fed officials are concerned with how quickly the central bank has tightened financial conditions. WSJ Fed mouthpiece Nick Timiraos said in his article that Powell & Co. might target a 50 basis point rate increase at its December meeting. That’s down from the current expectation of a 75 basis point hike.
Timiraos called the upcoming November FOMC meeting a “critical staging ground” to discuss the potential step down in rate increases.
He also listed quotes from several Fed officials who have voiced discomfort over raising rates by 75 basis points in December.
“I worry that if the way you judge it is, ‘Oh, another bad inflation report—it must be that we need more [rate hikes],’… that puts us at somewhat greater risk of responding overly aggressive,” Chicago Fed President Charles Evans told reporters on October 10th.
Kansas City Fed President Esther George also voiced concern.
“A series of very super-sized rate increases might cause you to oversteer and not be able to see those turning points,” she said last week.
And while none of this was really new – these quotes were made publicly – the fact that Timiraos covered it was enough for bulls to get excited. He’s privy to information that most investors, not even the Wall Street elite, don’t have access to. The Fed has provided Timiraos with a steady feed of “report bait” in the past and his predictions have mostly come true because of it.
Long story short, Timiraos says that a number of Fed officials are ready to discuss slowing the rate hikes so long as it does not trigger an epic stock “melt-up” to new highs.
Treasury yields dove lower in response to the news but were still up from yesterday. The iShares Barclays 20+ Year Treasury Bond Fund (NYSE: TLT) gapped lower today, too.
We’ve observed in the past that any equity rallies will be short-lived without a simultaneous bond rally. Stocks may be up big today, but unless Treasurys join in, this seems more like a “sellable peak” than anything else.
Analysts cautioned clients not to get too excited about Timiraos’ report.
“They keep jumping ahead to the last pivot, and we’re a long way from the Fed cutting rates,” explained Kathy Bostjancic, chief US economist at Oxford Economics.
“The equity market has been so eager to see pivots by the Fed. Fed officials have to explain that 50 basis points is still a meaningful increase.”
Renaissance Macro economist Neil Dutta added that the Fed’s spotty track record could indicate that Powell would rather overtighten than the alternative in the face of high inflation.
“At critical junctures in the monetary-policy decision-making process, they’ve been spectacularly wrong,” Dutta said.
“The doves are in the penalty box. There are costs to being wrong at key turning points over the last 18 to 24 months.”
And so, while it’s okay to feel a little bullish about today’s development, it might not make much sense to go all-in on dip buying just yet. Is this the market bottom? Maybe, maybe not.
At the very least, traders should wait for Big Tech earnings to pass before making any major decisions, especially as market volatility continues to climb.
