Stocks rose yesterday dragged higher by energy and defense stocks in the wake of terrorist attacks on Israel. A sad event for humanity led to a climb in equities that left few willing to celebrate.
The Fed’s grip tightens with very little effort. With the next Fed policy meeting about 3 weeks from now, markets are expecting a 14% chance of a rate hike. In some places, that would be considered a respectable probability, but in the stock market it is considered a very low probability. It can be classified by the phrase “broadly expect rates to remain unchanged.” And yet, just a few weeks ago, the Fed kind-of shocked the markets by predicting that rates would be +25 basis points higher by the end of the year. That’s right, a majority of the central bankers are… um, banking on another rate hike. It’s out there for all to see, in the forecast release and the dot plot. I would post it, but I have some other interesting charts for you today. Remember that the Fed wants to make life difficult for us consumers and corporations with hopes that we will simply stop spending money and allow inflation to normalize. The last time the Fed raised interest rates was back in July, and it was a small +25 basis-point bump compared to last year’s draconian ones. Since then, there have been no rate moves… AND yet financial conditions have become more restrictive. Have a look, then keep reading.
This is a chart of the Bloomberg Financial Conditions Index which is calculated using a number of rate-sensitive instruments, and you will note that conditions have tightened significantly since July and in a pronounced way since early last month. I am sure that this will not surprise you too much if you have been paying attention to longer maturity Treasury Note yields. In case you missed it or were too busy to read my daily rants, those yields have gone up in cruel and unforgiving fashion. I get it if you aren’t interested in bonds, but those bond yields have caused setbacks for equities as well, so I am sure that you are with me on this. So, the key takeaway here is that financial conditions are tighter since July and the Fed has done little more than talk tough. More recently, however, we have witnessed some Fed members pay homage to higher market-driven bond yields… in a pleased kind-of way. “What does the 10-Year have to do with you and me, Mark,” you ask? Take a look at the following chart, then keep reading and join me to the finish line. Go on, I can wait.
You don’t have to stare at this chart too long to notice that 30-year Mortgage rates are closely correlated with 10-year Treasury yields. By now, you have also noticed how both have run up significantly since the Fed’s last move… having very little to do with the Fed. This, my friends, is more of the market doing the Fed’s bidding, and it is likely why the Fed will not hike at its next meeting. Mind you this is all a “for now” analysis because you know that conditions can and do change rapidly. Keep an eye on the inflation numbers over the next few days and keep an ear on all the Fed speak today and tomorrow for some more clues.
WHAT’S BUBBLING IN THE PREMARKET
PepsiCo Inc (PEP) shares are higher by +0.80 in the premarket on high volume after the company announced that it beat EPS and Revenue estimates in the last quarter. The company also raised its earnings growth forecast. The stock has been under pressure recently as traders are betting that obesity drugs will reduce demand for the company’s famous snacks and sugary drinks. Dividend yield: 3.13%. Potential average analyst target upside: +20.2.
Juniper Networks Inc (JNPR) shares are lower by 3.50% in the premarket after JPMorgan Chase downgraded the stock to NEUTRAL from OVERWEIGHT as the company faces CAPEX spending headwinds and lack of what the analyst terms as “hyperscale” investments in AI. Dividend yield: 3.28%. Potential average analyst target upside: +20.3.
YESTERDAY’S MARKETS
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