At 11 am PST/2 pm EST, we will get an insight of what Fed officials were thinking, saying and voting in the last Fed meeting with the release of FOMC minutes. The releases have been anticipated given the notion that the markets think the Fed will soon pause or pivot. Any sort of dovish language would be bullish for the stock markets. Any overly hawkish language… and well you know what would happen.
The drama gets more interesting given the comments from Cleveland Fed President Loretta Mester last week, where she said she would have favored raising interest rates by 0.50% a month earlier. AND stating the Fed has more work to do:
“The FOMC has come an appreciable way in bringing policy from a very accommodative stance to a restrictive one, but I believe we have more work to do,” Mester said at a Global Interdependence Center conference at the University of South Florida Sarasota-Manatee College of Business.
“Indeed, at our meeting two weeks ago, setting aside what financial market participants expected us to do, I saw a compelling economic case for a 50-basis-point increase, which would have brought the top of the target range to 5 percent,” Mester said.
Mester did say one other voting member also did favor a 50 basis point hike. We know this was Bullard, and he doubled down on his hawkishness today.
St. Louis Fed President James Bullard has come out telling CNBC that he favors faster rate hikes. A more aggressive rate hike now would give the Fed a better chance to bring down inflation.
“It has become popular to say, ‘Let’s slow down and feel our way to where we need to be.’ We still haven’t gotten to the point where the committee put the so-called terminal rate,” he said during a live “Squawk Box” interview. “Get to that level and then feel your way around and see what you need to do. You’ll know when you’re there when the next move could be up or down.”
“If inflation continues to come down, I think we’ll be fine,” he said. “Our risk now is inflation doesn’t come down and reaccelerates, and then what do you do? We are going to have to react, and if inflation doesn’t start to come down, you know, you risk this replay of the 1970s … and you don’t want to get into that. Let’s be sharp now, let’s get inflation under control in 2023.”
A few weeks ago, I highlighted that the Fed was remaining hawkish, but the markets were betting against the Fed. They were betting that the Fed would pivot. I warned either the Fed or the markets were wrong and there would have to be a re-pricing. It would be volatile. And we may be seeing this currently:
I have always highlighted the bond yield charts for our readers. These are the charts you want to be following to determine where markets (and other assets!) are going. The 2 year closely follows the Fed rate, and it is looking to breakout…meaning the markets are finally realizing that the Fed is not bluffing, and more rate hikes are coming before they hit their terminal rate.
The 10 year just broke out, and if it remains above 3.88%, then higher yields are coming which will put pressure on stocks.
Both of these charts will move on the FOMC minutes.
I am watching the US dollar, and also highlighted this chart for readers. A new uptrend might be starting after a downtrend which began in November 2022. The big question: is this dollar move due to a hawkish Fed and markets re-pricing this? Or is it fear due to geopolitics? Likely the former, since the latter would see money also buying bonds which would bring down yields.
A major breakout could trigger if we take out 105. FOMC minutes could be the catalyst. As long as the US dollar remains above 103, the potential for a new uptrend remains.
The S&P 500 broke below a recent range which developed at the 4200 resistance zone. However, we have still broken above a major downtrend line. A retest comes in around 3900. If the S&P 500 drops further, I would really watch this zone. A breakdown would shift my stance.
But perhaps the Nasdaq is what we should be watching. We are now retesting the breakout zone. And we have the FOMC minutes catalyst upcoming. If we close below 11,850 in the coming days, I would really be worried about the momentum in this stock market rally.
I should note that the Dow Jones did not participate with the S&P 500 and the Nasdaq in recent rallies. Now, all US equity markets are back below my moving averages.