DOW 30,820 (+114), S&P 500 3,790 (-66), Russell 2000 1,762 (-25), NYSE FANG+ 4,943 (-130), ICE Brent Crude $90.11/barrel (-$0.51), Gold $1,675/oz (+$4), Bitcoin ~18.9k (-85)
MAC Desk Commentary:
For the third consecutive meeting the FOMC hiked the Fed Fund target rate by 75bps to 3%-3.25%, as widely expected. The statement was uncontroversial with essentially no changes to the language. There were no dissenters for today’s decision, but the differing opinions were much more apparent with the Summary of Economic Projections. The economic projections directionally all moved as expected with GDP estimates lowered while unemployment and inflation rates both moved higher. The GDP and unemployment projections were only modestly adjusted which doesn’t suggest that the Fed believes it will really need to inflict the “pain” that Powell suggested would be necessary a couple of weeks ago. Their projection for peak unemployment is only 1% higher than the recent trough. In terms of inflation the adjustments were also very modest, and officials don’t see inflation hitting their targets until 2025.
Which brings us to the DOT Plot and where most of the focus has been. For 2022 the median projection was 4.4% which was slightly higher than markets had expected. That suggests an additional 125bps of rate hikes over the next two meetings. However, the big question revolves around the ultimate destination as opposed to how we get there. That being said 2023 estimates were the focal point and once again this came in higher than market expectations at 4.6% (vs. 4.5%). The Committee seems evenly split between 4.5%,4.75% and 5% outside of 1 dovish outlier. The first rate cuts were seen in 2024 with projections at 3.9%.
In reaction to the hawkish Dot Plot rates shot higher and equity markets once again retested the lows seen over the last few days.
Chair Powell took center stage and repeated commentary from Jackson Hole highlighting the importance of price stability. He said the Committee is moving “purposefully to get to a sufficiently restrictive stance” and this will require some time of below trend growth. This was a touch softer than his Clubber Lang outright “pain” declaration in his Jackson Hole address, but the messaging seemed very similar. After taking his first question the Chairman gave a disclosure essentially saying, no matter what I say from here on out the main takeaway is that the Fed’s ultimate goal is unwavering. That disclosure was in response to the communication gaff at the July meeting, but it wasn’t really necessary as his message was consistent today. Pretty much all of the questions revolved around how/when the Fed will know it’s time to slow down/stop. He laid out three requirements: below trend growth, the labor market being more in balance and clear signs inflation is moving back to target. There was not much focus on the balance sheet today though he did say that outright sales of MBS is not something that they are/will be considering soon. The message today was consistent that rates are moving to a restrictive stance, will stay there for some time and doing this while pulling off a soft landing seems unlikely.
At the start of the press conference equity markets rallied all the way back to test this week’s high. However, as the press conference wrapped up equity markets moved lower again taking out the recent lows. The S&P 500 closed just below 3,800 filling the gap which kicked off the rally in July. Yields did back off after the initial thrust higher. This was most apparent on the long end. 10/30yr yields ended the day down ~6bps at ~3.515% which was ~10bps off the intraday high. 2yr yields ended the day up 9bps to 4.05%. This reflects market concerns that the Fed will ultimately tip the economy into recession. The US dollar index also shot higher ending the day up 1% hitting a new YTD high closing at $111.15 which continues to be a headwind and something to keep an eye on from a global perspective. The MSCI Emerging Markets futures ended today off nearly 2% and have been making new YTD lows since late last week.
While the market tries to digest today’s messaging and maybe more importantly the volatility, there are a ton of central bank decisions coming in the next twenty-four hours including: Brazil (imminently), BOJ, BOE, Switzerland, Norway, Taiwan, and Hong Kong. Economic data will claims and the leading index.
Comments from Mid-Day - The two levels to watch today are this week’s low ~3,825 and this week’s high ~3,900. On a break to the upside watch the declining 20d (~3,980), followed by the 50d (~4,040) and then the CPI gap down which came from ~4,100. On the downside as I’ve mentioned earlier markets have been making marginal new intraday lows the last couple of days, seemingly shaking out the weakest of hands before bouncing back. There are a couple levels to watch below 3,825. 3,815 is the 38.2% Fibonacci retracement off the pandemic rally. There is also small gap from just below 3,800 which kicked of the sharp July rally. The last ditch efforts to fend off a full retest of the June lows would come around 3,750.
3-Day 5min chart
- US - 2yr +9bps to 4.051%, 5yr -4bps to 3.713%, 10yr -6bps to 3.510%, 30yr -6bps to 3.518%
- USD index: +$1.18 to $111.13
- VIX: +0.83 to 27.99
- Bitcoin: -0.4% to ~18.9k
Have a good night.