“No plan for cuts ahead. Maybe more hikes. QT continues. And credit conditions are almost certainly tightening, which is likely equivalent to another hike.”
-Josh Steiner
Yesterday was a rate hike into an economic slowdown, #Quad4. As Keith would say 100% of the time, hiking into an economic slowdown crashes markets. There isn’t much else to say today. Josh simplified the complex perfectly for us.
Here are some quotes from Powell when he got asked about rate cuts:
- “At the end of the day we will bring inflation down to 2%. No one should doubt that.”
- “We have to bring inflation down to 2%, there are real cost to bringing inflation down to 2%. But the cost of failing are much higher. You can read your history, as I’m sure you have”
- “No, absolutely not. If we need to raise rates higher, we absolutely will… we will eventually get to tight enough policy to get inflation down to 2%.”
Powell stuck to his guns yesterday. He is focused on inflation with NO rate cuts.
Higher for longer!
Lastly, if you ever needed to know about the process on CNBC and needed further proof that it based on the color of their screen (thank you John):
- 2:45p - "Powell is really on his game and has successfully threaded the needle today"
- 4:00p - "Powell really should have paused today. There was no reason to take the risk of further destabilizing markets given the events of the past few weeks"
Back to the Global Macro Grind…
Before we get into the market data for today let’s look at the past 20 largest bankruptcies in America.
Five happened during 2000, with the first bankruptcy not being the last. But also, different from our current cycle was that the Fed was cutting rates the entire way down (from 6% to 1%)! There was also a period from Dec 2001 till Nov 2002 that the Fed held rates steady, during that period the largest bankruptcy happened (WorldCom).
Another seven bankruptcies happened during 2008 and 2009. With most notably the largest bankruptcy, Lehman, not signifying the bottom of the cycle. It would take another six months and another 44% drop in the S&P for the market to bottom. Also yet again, during this cycle, the Fed was cutting rates the entire time! Interestingly, again, from May 2008 till Oct 2008 the Fed held rates flat. During that period, the two largest bankruptcies happened: Lehman and Washington Mutual.
Where are we today? We have had two major bankruptcies (Silicon Valley Bank and Signature Bank). Thus far.
Our Fed has yet to cut rates. Our Fed isn’t even at the point of holding rates (flat). It's higher for longer and the Fed is looking to further tighten credit conditions…
So where are we at this point in the cycle? Not the bottom, we have earnings season to navigate next. Keep looking for the next play.
(Our team – Keith McCullough, Josh Steiner, David Salem and Daryl Jones – is hosting a webcast on this topic today at 11am ET. Join us for a discussion on Bank Failures, Contagion Risk & Coming Credit Event.)
With that, let’s get to the data around the world.
First on what the market is pricing in for rate hikes/cuts in the US: The market is currently giving a 50% chance to one more rate hike this year, during the May meeting. Then cutting rates in July.
The 2yr yield remains at the bottom end of the Risk Range. This is with the VIX also at the bottom of its Risk Range showing upside potential of 39% (towards 29) and downside potential of 2.2%.
Thankfully we have a go anywhere strategy where we are looking for opportunities while our competition debates the word “firming”. I won’t be on The Macro Show, but here are the tickers that should be asked about: South Africa $EZA, Copper $CPER, Palladium $PALL, Saudi Arabia $KSA, United Arab Emirates $UAE, and Thailand $THD.
Europe is opening down led by: Greece $GREK -1.6%, Ireland $EIRL -1.55%, Sweden $EWD -1.5%, and the UK $EWU -1.1%. Our 5 shorts in Europe are: Poland $EPOL, Sweden $EWD, Italy $EWI, Switzerland $EWL, and Finland $EFNL.
Speaking of the UK, it is expected that they will raise rates by 25 bps today and will raise rates one more time by year end. The inflation problem within Europe has persisted with the largest contributor being food inflation.
Economies also raising rates due to a pegged currency: Saudi Arabia, United Arab Emirates, Qatar $QAT, and Hong Kong $EWH. Brazil $EWZ held rates flat for the 5th consecutive meeting. Philippines $EPHE raised rates by 25 bps. Switzerland $EWL raised rates by 50 bps. Norway $NORW raised rates by 25 bps. Taiwan $EWT raised rates by 12.5 bps. Then finally we will get Turkey’s interest rate decision at 6a est.
The ETFs down the most yesterday (also up the most the past week): Bitcoin Miners $WGMI (-9.6%), Digital Transformation $DAPP (-8.7%), Crypto & Dig Econ $CRPT (-8.0%), and Galaxy Crypto $SATO (-6.8%). Bitcoin is opening up (+1.2%) this morning and remains the highest volatility asset in macro.
Keep your inventory moving and keep looking for that next play! Also make sure to tune into our macro themes presentation next Wednesday 3/29.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 30yr Yield 3.58-3.85% (bearish)
UST 10yr Yield 3.34-3.92% (bearish)
UST 2yr Yield 3.63-4.82% (neutral)
High Yield (HYG) 72.67-74.28 (bearish)
SPX 3 (bearish)
NASDAQ 11,003-11,912 (bearish)
RUT 1 (bearish)
Tech (XLK) 134-145 (bearish)
VIX 20.96-28.97 (bullish)
USD 101.89-104.99 (bullish)
Oil (WTI) 64.01-73.12 (bearish)
Gold 1 (bullish)
Copper 3.80-4.12 (bearish)
Silver 20.45-23.51 (bullish)
AMZN 88-102 (bearish)
META 178-210 (bullish)
NFLX 285-313 (bearish)
TSLA 166-198 (bearish)
Ryan Ricci
