Coming in for a landing… clear the runway

Stocks rallied yesterday as investors rushed in to buy the dip on a light news day. Home sales continue to slip according to the latest numbers, proof that rising mortgage rates are having an effect.

Walk lightly. What was that great news yesterday that caused stocks to fly high? Um…there really was none. Sometimes stocks are simply oversold, and sellers lose energy. As selling pressure subsides, buyers move in to buy the dip causing sharp rallies. In some cases, those rallies can be accelerated as short sellers rush in to cover shorts out of fear of giving up profits, or worse yet, losing money in a short squeeze. That seems like a reasonable hypothesis given last week’s sharp selloff prior to and after the Fed’s aggressive rate hike, combined with the fact that there was very little news yesterday. So now what?

I know that I have mentioned this more than once, but it does bear repeating. The Fed is going to continue to raise rates aggressively. Markets, however, have factored in the aggressive hawkishness. Here is how we know. Stocks sold off sharply after the June 10th Consumer Price Index release came in sharply higher than expected, even as many economists believed that inflation had peaked. What ensued was an -8.5% drop in the S&P500 through last Friday. That was the big reset with the realization that the Fed would indeed have to get more aggressive for the balance of the year. In the bond markets, the 2-Year Treasury note yield went from 2.81% to 3.35% in just 2 days. Those notes attempt to forecast where overnight rates might be in 2 years, and they are highly influenced by Fed rate policy. That 2.81% yield that pre-dated the CPI release represented +25 basis points higher than the largely accepted neutral rate. The following day’s close at 3.35% represented at least another ½ percentage point hike, bringing the rate well beyond neutral. Turning our attention to the futures market, forward rates for December went from 2.91% just before the release to 3.72% in the day after the release, still prior to the Fed rate hike last week. Those futures attempt to predict where overnight rates will be at the end of the year. At 3.72%, Fed Funds would be +125 basis points higher than the neutral rate and it implied, at the time, an additional +300 basis points of hiking over June, July, September, November, and December, in any number of different aggressive permutations. Then there was the Fed itself, which released its forecast last Wednesday. Those forecasts revealed that, on median, Fed governors believe that Fed Funds will be at 3.4% by year end, higher than the prior forecast of 1.9%. With that and the Fed having just hiked by +75 basis points to 1.5%, the Bank will have to raise by another +175 basis points or so by the end of the year. That could look like +75, +50, +50, or +75, +75, +25…have fun with it, but it seems likely that the bigger gains will come sooner. So, it is clear that the market has already factored in a quite-hawkish Fed over the next half-year.

With that, there is something new for the markets to contend with, recession. A polite way to talk about it is by calling it a hard landing. The Fed, with its rate hiking, is attempting to slow down demand and allow prices to moderate…but not too much so that the economy falls into a recession. That would be the elusive soft landing that the Fed seeks. The Fed believes that it could successfully pull it off, as evidenced by its year-end forecast for +1.7% GDP growth. It was revised down, for sure, but it was NOT revised into negative growth (recession). Additionally, Fed governors have been pretty clear in their speaking since last week’s rate hike, that a recession could be avoided. Economists at some of the largest institutions, on median believe that the probability of a recession is around 31 percent. Though some are beginning to revise those probabilities upward, most are still below 50%, even odds. Finally, there is the bond market. There we look at the shape of the yield curve for clues. When longer maturity yields are lower than shorter, we get curve inversions. That happens when traders are expecting economic trouble in the future, and those curve inversions typically occur before a recession. The two most popular ones to watch are the 3-month/10-year, which is currently at +151, not inverted, and the 2-year/10-year, which is currently at a flat +9 basis points, having briefly inverted in April. What does that mean? Well, as of now, the bond market appears to believe that a recession could be avoided, but by a hair. Finally, it is important to note that all these numbers represent a snapshot in time, and that they can change at any moment. Should positive news or economic numbers come in, they can improve… or vice versa. That brings us back around to the equity markets which have certainly reflected fear that the probability of a recession may be increasing. Volatility remains high with the VIX index still above 30, indicating that yesterday’s move may be simply part of the ups and downs that we can expect until more data can be collected and we get more of those expected, aggressive rate hikes under our belts.


Stocks staged a relief rally yesterday as traders swooped in to buy the dip on a light news day. The S&P500 gained +2.45%, the Dow Jones Industrial Average climbed by +2.15%, the Nasdaq Composite Index rose by +2.51%, and the Russell 2000 Index added +1.7%. Bonds fell and 10-year Treasury Note yields gained +3 basis points to 3.27%. Cryptos climbed by +4.72% and Bitcoin rose by +2.01%.


  • Chairman Powell will testify to the Senate Banking Committee. The semi-annual testimony is about monetary policy, so we can expect some sound bites to emerge, which can be market movers. The testimony begins at 9:30…pay attention.
  • More Fed speakers today. We will hear from Barkin, Evans, and Harker. They too will opine on rates, recession, and all manner of things that go bump in the night for equity traders.


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