Markets May Be on the Wrong Side of the Fed Again

Jackson Hole was a pivotal moment for markets; as Federal Reserve Chair, Jay Powell indicated, he was earnest about getting inflation to cool off, and it was going to be a long and challenging road ahead. The markets got the message loud and clear, resulting in a massive decline over the next several weeks.

But since that October low, the has increased sharply, almost 16%. It has yet to reach the massive gains witnessed in August, where the S&P climbed by nearly 19%, but the gains are still enormous. The significant increases have resulted in a considerable easing of financial conditions, likely to pressure Powell to confront the markets again on Nov. 30.

Financial Conditions Have Eased Too Much

What makes this Nov. 30 speaking event at the Brookings Institution all the more interesting is that financial conditions have eased back to levels that were last seen in August heading into Jackson Hole, and by one measure easier than at Jackson Hole.

The Chicago Fed National Financial Conditions Index (NFCI) and Adjusted NFCI show that conditions have eased dramatically from being restrictive back to being accommodative. The Adjusted NFCI has fallen back to its August lows, but the traditional measure has fallen below its August lows.

NFCI Vs. S&P 500 Daily

This is a problem for the Fed and potentially why Jay Powell will need to deliver a more hawkish message to markets at the end of November. The Fed transmits monetary policy through verbal guidance and ; this results in financial conditions easing or tightening. The Fed has made it clear that its monetary policy needs to be restrictive. The data showed that the policy had become restrictive in late October and early November. However, since the CPI report, that has all changed.

The October CPI Report May Have Given False Hope

The report gave investors hope that the US has seen peak inflation, and that may very well be the case, or it may not be the case. The October CPI report had a hidden fact that many investors may have overlooked due to a change in the health insurance costs, which had to do with a technical change in its calculation. This change will not be reflected in the PCE and Core PCE results when they come out on Dec. 1. Currently, estimates for are for it to rise by 6% year on year (yoy), while is expected to increase by 5.0% yoy.

Jay Powell needs to re-emphasize on Nov. 30 the Fed’s commitment to raising rates to bring inflation down through tighter financial conditions and that one CPI will not be enough to suggest the Fed’s job is done.

Has Black Friday overtaken Boxing Day to become the top sales event?

Australians are set to bring their Christmas shopping forward this weekend to bag large bargains and offset the spiralling cost of living.

New research from the Australian Retailers Association (ARA) estimates shoppers will spend a record $6.2 billion over the four days between Black Friday and Cyber Monday.

Key Points

  • Aussies are expected to spend $6.2 billion over the Black Friday weekend.
  • CommBank data revealed shoppers will spend an average of $482.90 this weekend.
  • Pre-Christmas sales are forecast to reach nearly $64 billion.

Australian Retailers Association CEO Paul Zahra said while Black Friday sales were an American tradition, more Aussies have hopped on the bandwagon to snag good deals.

“The Black Friday sales are the biggest pre-Christmas event on the retail calendar and its popularity is continuing to grow in Australia,” Mr Zahra said.

“We’re expecting huge amounts of traffic in-stores and online, with sales to reach $6.2 billion this year – an increase of $200 million on 2021.

“We know that many people are more conscious about their household budgets with the cost of living going up and interest rates on the rise, so the Black Friday sales are an ideal time to complete your Christmas purchases, save money and ensure that your gifts are delivered on time.”

This comes as card spending data from CommBank revealed 61% of the 1,035 survey respondents are planning to spend less on Christmas this year.

In an effort to stick to a smaller budget, more than a third (38%) of Black Friday and Cyber Monday shoppers will be on the lookout for Christmas presents across the four-day period.

Shoppers are expected to spend an average of $482.90 this coming weekend with many favouring technology and electronics, followed by fashion and clothing.

CommBank’s General Manager for Shopping Rochelle Eldridge said consumers are delaying purchases until this year’s Black Friday sales to help ease cost of living pressures.

“Elevated inflation and higher prices are putting pressure on many households which is making everyday savings top of mind for many Australians,” Ms Eldridge explained.

“We are seeing people prioritise essential items, with seven-in-10 shoppers planning to buy essential everyday items or larger items that they need at the sales this weekend.

“The sales are also a great opportunity to get ahead on Christmas shopping, or to spend less on bigger household expenses.”

According to the ARA, pre-Christmas sales are forecast to reach nearly $64 billion – a 3% increase on last year.

Has Black Friday overtaken Boxing Day to become the top sales event?” was originally published on and was republished with permission.

Treasury Market Warns of Elevated U.S. Recession Risks

Recent data for the US economy reflect a mixed profile, but several widely followed business-cycle indicators are screaming recession.

A pair of Treasury yield curves are signaling that the odds are high that a period of economic contraction is approaching. The for the and Treasury on Wednesday (Nov. 22) edged deeper into negative terrain, slipping to -0.71 percentage points, a new four-decade low. The 3-month/10-year spread is also negative. History strongly suggests that when these yield curves are inverted, as they are now, a US recession is near.

10-Year Treasury Constant Maturity Minus 2-Year Constant Maturity

10-Year Treasury Constant Maturity Minus 2-Year Constant Maturity

“Historically, when you get a sustained inversion like this… it’s a very reliable indicator of a recession coming,” says Duane McAllister, a senior portfolio manager at US firm Baird Advisors.

It could be different this time, and the main source of optimism remains two pillars of US economic activity: the labor market and consumer spending. On both fronts, the latest numbers continue to point to growth.

US payrolls increased 261,000 in October, a solid gain, albeit the slowest in nearly two years. Meanwhile, retail spending picked up last month, rising 1.3% from September. Taken together, these critical indicators continue to reflect an economic expansion.

But it’s been clear for some time that growth is slowing. The deceleration has been captured in a pair of proprietary indicators published in the weekly updates of The US Business Cycle Report. In this week’s issue, the Economic Trend Indicator and Economic Momentum Indicator for October remain close to their respective tipping points that mark the start of recession.

Economic Momentum/Economic Trend Index

Economic Momentum/Economic Trend Index

Forward projections for ETI and EMI through December point to the possibility of flat to slightly negative economic activity.

Economic Momentum/Economic Trend Index

Economic Momentum/Economic Trend Index

Business-cycle indicators from other sources paint a brighter picture, but only modestly. Consider the New York Fed’s Weekly Economic Index, which eased to its softest reading in a year-and-a-half. Extrapolating the recent trend suggests economic contraction will start in early 2023.

New York Fed’s Weekly Economic Index

New York Fed’s Weekly Economic Index

Keep in mind that the Federal Reserve is still expected to raise interest rates. The pace of hikes is projected to slow, but the effects of previous hikes and additional policy tightening will continue to strengthen economic headwinds in the months ahead.

The November and December economic numbers will be a critical test for deciding if the forces of growth succumb to contraction. For the moment it’s too close to call in terms of timing, although the Treasury market is signaling that a new recession is near. Optimists are looking to next week’s November report on payrolls (Fri., Dec. 2) to argue otherwise.

U.K.’s New Government Announces Fiscal Contraction as Inflation Soars

  • Critics fault new budget for failure to plan for long-term growth
  • US quiet ahead of Thanksgiving holiday as investors anticipate lower rate hikes
  • ECB policymakers show little enthusiasm for another jumbo rate increase

The new UK finance minister, Jeremy Hunt, presented his long-awaited autumn statement on the budget last week, calling for £55 billion in tax increases and spending cuts even though Britain is already in recession.

It was an effort to reverse the damage from his predecessor’s plan for £45 billion in unfunded tax cuts, which investors greeted in September by selling off UK government bonds and .

Hunt’s effort has kind of worked. The pound has risen to about $1.19, moving up in anticipation of his tighter budget from the low of $1.03 in September. Yield on the benchmark government bond has moved down below 3.15% after topping 4.5% in those September days.

Michael Saunders, a former Citigroup economist who was an external member of the Bank of England’s Monetary Policy Committee until August, was quick to spot the problem in Hunt’s plan, though.

“I thought the autumn statement just had a massive big hole where a long-term growth strategy should have been,” Saunders told CNBC this week.

But this expert goes on to explain that the government had little choice in the short term, because the economy’s output potential has been permanently weakened by a combination of factors, not the least of which is Brexit.

“A part of the reason why things are so bad is because potential growth is so weak and is expected to be weak,” Saunders said.

“That’s why in the MPC’s view, even though GDP is expected to be slightly below 2019 Q4, they think the economy is in significant excess demand, in other words, has overheated, even with no growth. They think potential output growth for the next few years will be less than 1% per year.”

Hunt’s predecessor, Kwasi Kwarteng, had the right idea in wanting a fiscal stimulus for growth. He made the fatal mistake, however, of underestimating or ignoring market sensitivity to UK deficits.

Hunt’s fix is a bit of smoke and mirrors. Most of his spending cuts will come in 2025, after the general election expected sometime in late 2024. The goal was to show markets the government’s good intentions while shielding consumers from the brunt of fiscal contraction until after the vote.

UK soared to 11.1% in October and Bank of England Governor Andrew Bailey warned that more rate increases would be necessary to bring it under control.

All was quiet on the western front as the United States shut down for the Thanksgiving holiday this Thursday. It is now widely accepted that the will raise its overnight rate only by 50 basis points (bp) at its mid-December meeting after four 75 bp increases in a row. Depending on how evolves, the Fed could ease even further next year.

Expectations for interest rate hikes at the mid-December meeting of the European Central Bank’s governing council have also been scaled back, with economists counting on an increase of only 50 bp despite ECB’s insistence it will proceed with higher rates no matter how much it hurts.

In fact, recession fears are beginning to get the upper hand. Although a ferocious hawk-like Austrian central bank governor Robert Holzmann is pushing for the third 75 bp hike in a row, other policymakers are less enthusiastic.

The dovish head of Portugal’s central bank, Mario Centeno, said on Monday that even though the ECB needs to bring under control, he sees a good chance that an increase of less than 75 bp could be in store for December.

ECB chief economist Philip Lane, another dove, also said on Monday that the central bank could continue raising rates into next year, but increases could well be smaller than the last two.

European inflation in October was 10.6% after the preliminary reading of 10.7% was revised downwards last week. Lane said that after the has raised rates 200 bp over the past three meetings, there is little impetus for another huge hike.

Recession ‘almost certain’ if inflation continues, says RBA

The Reserve Bank has stressed the need to stabilise rising consumer costs to avoid all Australians paying a ‘heavy price’.

RBA Governor Dr Philip Lowe has the central bank’s commitment to combatting inflation, with interest rates set to rise further.

Key Points

  • RBA Governor says recession “almost certain” if there is a prolonged battle to lower inflation.
  • The RBA will continue to raise the cash rate to bring inflation down.
  • Current forecasts suggest inflation will begin to decline, but further disruptive supply shocks are a real possibility.

However, the price of monetary policy tightening and battling inflation is a potential recession, as it takes demand out of the economy.

Speaking at the annual Committee for Economic Development of Australia in Melbourne on Tuesday night, Dr Lowe highlighted the consequences of high inflation in the 1970s and 1980s to demonstrate the need for the RBA to take action.

“High inflation meant lower growth, fewer jobs and lower real wages,” Dr Lowe said.

“Another lesson from these decades is that bringing inflation back down again after it becomes ingrained in people’s expectations is very costly and almost certainly involves a recession.”

He said that given the RBA’s remit for price stability and full employment, the cash rate (currently at 2.85%) was expected to continue to rise to lower inflation.

“We understand that many people are finding the rise in interest rates difficult,” Dr Lowe said.

“It is necessary, though, to ensure that the current period of higher inflation is only temporary … if high inflation were to persist, all Australians would pay a heavy price.

“We have not ruled out returning to 50 basis point increases if that is necessary.”

Dr Lowe did say that the RBA’s forecast is for inflation to peak later this year at around 8%, before declining gradually to be just over 3% by the end of 2024.



This expectation is based on COVID supply disruptions being resolved, commodity prices stabilising, and global rises in interest rates slowing demand.

However, he warned that several global trends are likely to continue to cause more variability in inflation, such as the impact the increased frequency of extreme weather events has on the supply of goods.

Natural disaster trend

“It is not just food production that is affected by extreme weather. It also disrupts the production of commodities and the transport and logistics industries,” Dr Lowe said.

He also said that the global transition towards green energy could result in higher and more volatile energy prices.

Recession ‘almost certain’ if inflation continues, says RBA” was originally published on and was republished with permission.

The Overnight Report: Winding Down, And Up


On the back of increasing Chinese covid cases and lockdowns, base metal prices were all down -2-3% on Monday night, was down -1.5%, and was also lower. Yesterday the sector rose 1.2%.

Go figure.

Meanwhile, prices had closed slightly lower on Monday night but rose 2.6%. Having spent last week tumbling on lower prices, yesterday coal miners shot up again as coal prices recovered. Whitehaven Coal Ltd (ASX:) gained 7.8% and New Hope Corporation Ltd (ASX:) 7.3%.

When coal miners move they don’t muck around.

Oil & gas companies were also in demand yesterday, with Woodside Energy Ltd (ASX:) rising 2.9%. All because the Saudi oil minister said rumours of OPEC increasing production were untrue. Oil prices had fallen -6% on the rumour and were back to square on the denial before the market opened yesterday.

Throw in a 0.3% gain for the yesterday and the ASX200 is once again knocking on the door of 7200 – last seen in June before global markets tanked.

Virgin Money PLC (ASX:) saw a somewhat delayed response yesterday to its earnings report on Monday, and accompanying buyback announcement, and jumped 10.6% to top the index.

Technology One Ltd (ASX:) reported earnings yesterday and rose 5.1%. The technology sector gained 1.0%.

Threats of regulation of BNPL companies kept Block Inc (ASX:) weak again yesterday, down -3.2% to top the losers’ board. Block also dabbles in crypto, and that space is an ever growing graveyard right now.

RBA governor Philip Lowe used his last night to warn workers that if they keep pushing for higher wages as compensation for the higher cost of living, they will only fuel inflation, which will drive the cost of living higher still.

That’s what happened in the seventies – the classic wage-price spiral – as half the country’s workforce was on strike for higher wages at any given time. It took a decade, and a recession, to resolve.

The lining, Dr Lowe promised, is that if we can “ride through this period” with wages barely rising and the problem of rising prices getting “resolved”, then inflation will come down. “It can be painless,” he said.


If you need confirmation, just look across The Dutch. After a series of 50 point rate hikes, to take its cash rate to 3.50%, the RBNZ is widely expected to by an unprecedented 75 points this morning.

The reason is is at 7.2%, and wage inflation is at a record level.

The other reason is the RBNZ now takes a three-month Chrustmus break. Nice work if you can get it.

What Inventory Problem?

US retailers Best Buy Co Inc (NYSE:), American Eagle Outfitters Inc (NYSE:) and Abercrombie & Fitch Company (NYSE:) all reported quarterly earnings last night and rose 12.8%, 18.2% and 21.4% respectively.

The assumption was this week’s Thanksgiving sales would bring a bonanza of bargains in discounted inventory retailers are all stuck with, due to over-ordering to get ahead of supply-chain blockages. Target Corporation (NYSE:) had been the poster child for this predicament.

But it looks increasingly like Target, and others, were simply the victims of poor execution. Not all retailers are tarred with the same brush.

The results provided a bit of a fillip for Wall Street last night, helping to overcome the drag of Chinese lockdowns. Or at least a fillip for the handful of people in attendance. Volumes are now holiday-thin, and there’ll be tumbleweeds rolling through the NYSE by tomorrow afternoon in New York.

It is not unusual for Wall Street to get a little bit carried away heading into Thanksgiving. The next Fed meeting is over three weeks away but the market is increasingly more confident in only a 50 point hike, and in inflation having peaked.

The October inflation numbers are due next week and the November is out the day before the Fed decision.

History also suggests Wall Street typically rallies into the new year, and investors are hoping 2022 is no different. It doesn’t always, of course, and when it doesn’t it can be quite spectacularly bad.

Whatever happens tonight, it will be on very low volume.


Having risen the night before, last night the US bond yield fell -7 points to 3.76% and the fell -0.6% to provide some relief for metal prices, despite there being no change to the situation in China.

There were 27,307 new cases recorded for Monday, just shy of the previous record 28,973 reached in April.

Oil prices also gained some ground after the Saudis shot down any notion of production increases.

The is once again back from the brink, up 0.7% at US$0.6647.


The SPI Overnight closed up 62 points or 0.9%. That implies the should break through 7200 today.

The index first conquered 7200 in May 2021, on the way up, before dropping back through in June this year, on the way down. The peak was 7624, in August 2021.

We await the RBNZ decision.

The minutes of the November Fed are out tonight, along with US new and .

The world will flash estimates of November PMIs today/night.

Shopping Centres Australasia Group (ASX:), Qube Holdings Ltd (ASX:) and Wisetech Global Ltd (ASX:) are among the companies holding AGMs today.

The Overnight Report: Winding Down, And Up” was originally published on and was republished with permission.

5 Lessons Traders Can Learn from the FTX Collapse

The FTX saga and Sam Bankman-Fried’s illegal and extremely unethical actions capture much of the financial press’s attention right now. For good reason. The real-life story has echoes of Long-Term Capital Management, Enron, Tyco, Lehman Brothers, and Bernie Madoff all rolled up into one. More broadly, though, without much fanfare, we crossed the one-year anniversary of the top in crypto.

Last November, Total Crypto Market Cap Reached $3 Trillion

Bitcoin Daily

Source: TradingView

It was on Nov. 10, 2021, when reached an all-time high of $69,000. Since then, the pain trade has been lower for the HODLers as all digital assets from the major coins to altcoins to stablecoins have endured volatility and high uncertainty. Crypto lenders and so-called exchanges have gone bankrupt, and investors are left wondering what to do with (and where to keep) their assets.

I have five lessons traders can learn in light of the past year’s wild price action and bearish narratives that now cast a shadow over the once-darling crypto universe.

1. Position Sizing

It is generally thought that the more volatile an asset is expected to be, the smaller you should make it a part of your portfolio. Whether it’s crypto or stock, if the implied volatility (IV) is, say, 100%, then perhaps a 1% size is right. If the IV is relatively low near 25%, then a 4% stake could be right. You do you, but this general rule can help you sleep at night and better manage risk.

2. FOMO Is Real

The fear of missing out (FOMO) was intense in crypto during 2020 and 2021. Money was burning holes in folks’ pockets, we were all bored and cooped up at home much of the time, and we couldn’t help but notice seemingly everyone else making scores in stocks and crypto. One survey revealed that 70% of crypto holders began investing in 2021. Those folks are now the bagholders, unfortunately.

3. A Trade Vs. an Investment

How often have you bought a stock only to see it drop in value immediately? It happens to all of us. The differentiator between good traders and those who struggle is often cutting losses short and not letting a short-term trade end up being a long-term loser in your portfolio. Knowing your timeframe is important – and that goes for the exit side of the trade.

4. Use Leverage Wisely

Answer this: If you could have bought Amazon (NASDAQ:) at its IPO price in 1997, how much money would you have borrowed to enhance your long-run return? Three times, 4x? More? If so, you’d have been wiped out during the dot-com crash. Leveraging a volatile asset, like bitcoin or , spells eventual doom for even seasoned traders.

5. Have a Plan with Cash

This last one applies to me big time. I admit I had a high cash buffer for much of 2021 as stocks and crypto soared. It felt awful. I opened up a few alternative asset accounts since savings account yields were near 0%. Those have fared okay, but the complexity, extra tax burden, and just having to check another account periodically makes it seem not worth it. Many investors had swelling checking account balances care of the COVID stimulus programs and felt they had to do something with it—hello crypto. So, it may have been an investment born by boredom rather than a truly thoughtful asset allocation decision.

The Bottom Line

The one-year anniversary of the crypto top and unfortunate timeliness of the FTX blowup makes it an opportunistic time to review your investing and trading plans. Set rules for yourself and always be mindful of careless investment decisions.

Disclaimer: Mike Zaccardi does not own any of the securities mentioned in this article.

Despite Rebound, Risk-Off Sentiment Continues to Dominate Global Markets

Although there have been hints that the worst of the selling has passed, there’s still plenty of room for skepticism, based on trends for key markets via a set of ETF pairs for prices through Thursday’s close (Nov. 17).

Let’s start with the ratio of an aggressive asset allocation strategy (AOA) to conservative (AOK). Although the trend for this proxy has popped lately, the downside bias remains intact, based on 50- and 200-day moving averages and so it’s premature to assume that the bear market has been exhausted.

Global Portfolio Strategy Trend

Global Portfolio Strategy Trend

The downside bias for medium-term Treasuries, via iShares 7-10 Year Treasury Bond (NYSE:), relative to short-term Treasuries, iShares 1-3 Year Treasury Bond ETF (NASDAQ:), certainly hasn’t changed, which suggests that the appetite for safety remains strong.

Risk-on for the inflation/reflation trade continues to hold its ground, based on the ratio for inflation-indexed Treasuries, via iShares TIPS Bond ETF (NYSE:), vs. their standard counterparts (IEF), but the trend is looking tired and is vulnerable if the economy continues to weaken.

US Inflation/Reflation Trend

US Inflation/Reflation Trend

Estimating the risk appetite for US equities, via SPDR S&P 500 (NYSE:), relative to a portfolio of low-volatility shares, via iShares MSCI USA Min Vol Factor ETF (NYSE:), continues to signal risk-off.


A proxy for economic activity – semiconductor stocks, via VanEck Semiconductor ETF (NASDAQ:), vs. equities overall (SPY) – has enjoyed a relief rally lately, but it’s too early to say that the bearish trend for this proxy has ended.


Despite the bearish bias for stocks generally, the appetite for US equities, via Vanguard Total Stock Market Index Fund ETF Shares (NYSE:), over foreign stocks, via Vanguard FTSE All-World ex-US Index Fund ETF Shares (NYSE:), persists.


Finally, relative strength for value stocks, via iShares Russell 1000 Value ETF (NYSE:), vs. growth stocks, via iShares Russell 1000 Growth ETF (NYSE:), continues to run. The logic is the widely held view that value shares tend to outperform when interest rates are rising. On that basis, expectations that the Federal Reserve will continue to hike rates in the near term imply that value will continue to outperform.


Inflation Probably Not Going Away Anytime Soon

Markets went into a euphoric mood after the report came in lighter than expected last week. While the numbers showed that the pace of inflation might be slowing, it remains just one measure of inflation, with other estimates showing something completely different. So despite the excitement about the disinflationary forces witnessed in the CPI, any conclusion may prove to be premature.

Market-based inflation expectations have plunged since the beginning of November and fell further after the CPI report. But consumer-based inflation expectations have been on the rise, based on surveys from the and the .

Market-Based Inflation Expectations May Be Heading the Wrong Way

Since the beginning of November, 5-year breakeven inflation rates have plunged from around 2.7% to about 2.35%. That is a significant drop in a short period. It also makes one wonder if the market has gotten ahead of itself on how quickly it sees inflation falling.

5-Year Breakeven Inflation Rate

5-Year Breakeven Inflation Rate

As market-based inflation expectations fall, consumer-based inflation expectations are rising. That last part may be the most important.

The shift in consumer-based inflation expectations follows a consistent trend of falling over the past few months. The latest data from the NY Fed shows that three years ahead, expected inflation rates have risen to 3.11% from a low of 2.76% in August. Meanwhile, the University of Michigan survey sees inflation rising at 3% on a time horizon from a low of 2.7% in September.

UMich 5-10 Year Vs. NY Fed 3-Year Inflation Expectations

UMich 5-10 Year Vs. NY Fed 3-Year Inflation Expectations

Consumer-Based Inflation May Be Leading the Way

These consumer-based inflation expectations could tell us that market-based inflation expectations are due to rise again. From comparing the data and looking at the University of Michigan and the NY Fed against market-based three and 5-year breakeven inflation expectations, it seems pretty clear that consumer inflation expectations bottomed before market-based expectations in late 2019 and early 2020 and peaked before market-based expectations in late 2021 and early 2022. The turn higher in the Michigan and NY Fed surveys could tell us where market-based expectations are heading.

UMich, NY Fed, Market 3 and 5-year Breakeven Inflation Expectations

UMich, NY Fed, Market 3 and 5-year Breakeven Inflation Expectations

Corporate Impacts

The reason is that consumers are feeling the effects of rising prices firsthand. Target (NYSE:) recently reported very weak , causing the stock to plunge. The company noted that sales and profits weakened towards the end of the quarter as rising prices and interest rates impacted shoppers. Meanwhile, Walmart (NYSE:) raised its outlook for the year as it attracted more high-income shoppers looking to offset the cost of rising prices elsewhere.

Based on some of this anecdotal evidence, the eutrophic nature of the market following that cooler-than-expected CPI was not only too early but maybe entirely wrong. The market may soon find that its view on the pace of inflation slowing needs to be revised and that it may find over time that inflation tends to travel in waves, which means periods where it rises, followed by periods where it falls.


Disclosure: Charts used with the permission of Bloomberg Finance LP. This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Past performance of an index is not an indication or guarantee of future results. It is not possible to invest directly in an index. Exposure to an asset class represented by an index may be available through investable instruments based on that index. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should know the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment. Michael Kramer and Mott Capital received compensation for this article.

Fed Pivot Expectations Take a Hit

Speculation that the Federal Reserve is close to pausing its rate hikes took a hit this week after a Fed official downplayed the odds in a TV interview on Wednesday.

“Pausing is off the table right now,” says San Francisco Fed President Mary Daly tells CNBC yesterday (Nov. 16). “It’s not even part of the discussion. 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.”

The equities market is getting ahead of itself in seeing a pause in rate hikes, much less a reversal, for the immediate future, says the chief client officer at Aspiriant, Sandi Bragar, a wealth manager:

“The market is just trying to grasp for news and it’s prone to overcompensate for the news, whether it’s good news or bad news. We’re just at that point in the cycle where we think there’s still the high likelihood for potential downward trajectory of stocks as we head into 2023.”

The Fed funds futures market this morning is pricing in high expectations of a slower pace of rate hikes going forward. A 50-basis-points increase is assigned a roughly 85% probability for the next FOMC meeting on Dec. 14, according to CME data. If correct, it will mark the first softer increase after a string of 75-basis-points increases this year. Looking into early 2023, another rate hike, perhaps just 25 basis points, is also considered possible at the February meeting, according to futures.

The case for a pause or pivot also looks premature based on comparing the effective Fed funds rates with the , which is widely seen as the most policy-sensitive maturity. History suggests that the 2-year rate is a relatively reliable proxy for Fed funds expectations. That’s certainly been true in the current rate-hiking cycle. Notably, the 2-year rate began rising well ahead of the first rate hike in March.

2-Year US Treasury Yield/Fed Funds Rate Daily Chart

2-Year US Treasury Yield/Fed Funds Rate Daily Chart

An early market signal that Fed rate hikes are close to a pause will arrive when the 2-year rate is roughly equivalent to effective Fed funds rate. When the 2-year rate falls decisively below Fed funds that will be a strong signal that the central bank is close to cutting rates at some point in the near future. But as the chart above suggests, a pause – much less a cut – is nowhere on the immediate horizon, based on the 2-year rate trading well above Fed funds.

Looking at the 2-year/Fed funds spread provides a more granular profile of how these two rates are evolving and on that front it’s reasonable to say that the rate-hiking regime has peaked. That alone doesn’t mean that a pause or pivot is imminent, but it provides a framework for concluding that the tide has turned.

2-Year Yields/Fed Funds Rate Spread

2-Year Yields/Fed Funds Rate Spread

There’s been a clear decline in the 2-year/Fed funds spread in recent months. Although this rate difference has been volatile, a downside bias is conspicuous. If the current spread – roughly 50 basis points – falls below this level, which has acted as a floor of late, it may signal that a pause is near.