Ever since US stock markets triggered their recent breakout patterns, a bunch of news stalled any momentum.
We of course had the news of a missile hitting Poland and almost starting World War III due to NATO Article 5. It appears now that the missile was Ukrainian and not Russian. Media is saying this was unfortunately a “stray missile” and an “accident”. World War III fears have cooled down for now.
This fear was important for traders because we saw signs of a risk off environment. I have said the 10 year yield is the most important chart as when it drops, it is usually a strong signal for higher stock markets. This did not turn out to be the case this week when yields were dropping.
Why? Risk off and fear. Money was running into the safety of bonds which caused yields to drop and stock markets to drop.
I think it is important to keep this fear reaction in mind.
But now, yields are rising as markets drop. Bonds are selling off so the fear is dissipating. So what’s happening now?
Fed members. We have had multiple Fed members come out saying different things and it is causing some uncertainty in the markets. I mean traders thought the Fed was going to slow down or even pause rate hikes come December.
We had Fed Waller initially spoil the party last week when he said rate hikes might have a slower pace but rates need to head higher. Then Fed Brainard said that it may ‘soon’ be appropriate to move to a slower pace of rate hikes.
We then had San Francisco Fed President Daly come out saying that she sees rates heading at least another percentage point higher to around 5%. This is where she sees the point where the Fed will be able to evaluate the impact of its hikes before moving forward.
BUT here is the key. Daly said that “pausing is off the table right now“. In other words, interest rates are still heading higher.
“I still think of that as a reasonable landing place for us before we hold, and the holding part is really important,” she told Steve Liesman during the “Squawk on the Street” interview. “It’s a raise-to-hold strategy.”
“Pausing is off the table right now. It’s not even part of the discussion,” she said. “Right now, the discussion is rightly around slowing the pace and … focusing our attention really on what is the level of interest rates that will end up being sufficiently restrictive.”
And then St Louis Fed President James Bullard chimed in. He dropped a shocker saying, “the policy rate is not yet in a zone that may be considered sufficiently restrictive.” Stating the Fed still has a lot of work to do before it tames inflation.
He also said that Fed rate hikes have had limited effects on observed inflation. The key takeaway? Bullard believes interest rates need to head much higher. 5% could serve as the low range for where interest rates need to be, and the upper bound might be around 7%. This is higher than the current market pricing expectations and unofficial Fed forecasts.
While many Fed members have been talking about slowing the pace of rate hikes, Bullard wants rates to increase more. Could there already be some dissent among the voting members of the FOMC?
Uncertainty, and I have a feeling the Fed may not be dovish come the December meeting. Yes, a lower rate hike with 50 basis points, but Powell will remain a hawk.
US stock markets are feeling it.
The two charts I am watching are the S&P 500 and the Nasdaq. Both of these markets have broken out and technically are in an uptrend. However, there is danger that these uptrends are going to be labeled false breakouts and the downtrend resumes.
The S&P 500 is currently retesting the breakout zone and must remain above it by the close today to have any hopes of maintaining an uptrend.
The Nasdaq is right there as well. Buyers are currently stepping in on the retest which is a good sign thus far, but there is still a lot of time left in the trading day.
We do not want to see the Nasdaq close below 11,500. That would confirm a fake out.
It is quite the difficult market to trade as one needs to navigate geopolitics as well as interest rate expectations. With all these Fed statements, it will just confuse the heck out of traders. However, I have been reminding readers about an important fact: there has never been a time in economic history where inflation which was over 5% was tamed with interest rates being below the rate of inflation. This means that rates need to head much higher.