“In any moment of decision, the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing.”
-Theodore Roosevelt
Well, here we are again . . . it is the day that the Federal Reserve sets interest rate policy. At points over the last year, the decision the Fed was going to make remained a bit of a mystery. Today, most of the pundits and Fed funds futures are in total agreement, the Fed will do nothing.
Now when I said everyone agrees, I wasn’t quite being accurate. In fact, both the bond market and the U.S. dollar appear to be suggesting that this rate hiking cycle isn’t quite done. Not to say the Fed will surprise and hike today, but perhaps, just perhaps, they will again in the not-so-distant future.
As it relates to the point of rates above, Treasury yields across every duration are higher now as compared to the last FOMC rate announcement in late July. This is most noteworthy on the longer end of the curve where yields are close to 50bps higher depending on the duration and generally near cycle highs. Meanwhile, the U.S. dollar Index has tacked on about +3.5% since then.
It is almost as if the market has decided to take the fight against inflation into its own hands. And really, who could blame it? After all, this is what Chairman Powell said in Jackson Hole in late August (emphasis mine):
“At upcoming meetings, we will assess our progress based on the totality of the data and the evolving outlook and risks. Based on this assessment, we will proceed carefully as we decide whether to tighten further or, instead, to hold the policy rate constant and await further data. Restoring price stability is essential to achieving both sides of our dual mandate. We will need price stability to achieve a sustained period of strong labor market conditions that benefit all.
We will keep at it until the job is done.”
Since those comments, most measures of inflation have exceeded expectations and the labor market has tightened on the margin. Given the recent moves in many commodities, the re-acceleration of inflation may be just beginning. But whatever the Fed does or says today, just keep in mind that Mr. Market is not mincing words at all on the topic of inflation.
Back to the Global Macro Grind…
As treasury yields have climbed higher, we are again seeing this impact most directly in the U.S. housing market. While 30-year mortgage rates have cooled a bit in the last few days, they hit a near 22-year high earlier this month. The recent housing data reacted accordingly:
- August Housing Starts fell -11.3% M/M to the lowest level since June 2020;
- The September NAHB Housing Index fell by -5 points M/M to the lowest level since April 2023;
- Redfin noted that almost 15.7% of home purchase contracts were cancelled in August, which is the highest level in a year; and
- MBA Monthly Mortgage Applications for September are at a cycle low and down some -26% Y/Y.
Now perhaps Chair Powell believes that by doing nothing today, he will arrest the fact that the demand side of the housing market has gone no bid. Practically speaking, though, housing is probably not a big focus for the Fed at the moment. That said, housing will become a bigger issue for GDP if activity continues to stall, just as its resilience has been a surprising boost to GDP this year.
Getting back to the U.S. dollar for a second, maybe the continued strength is not so surprising given global rate dynamics. While the ECB did raise rates last week, in the policy statement the ECB said:
“ . . . that the key ECB interest rates have reached levels that, maintained for sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.”
The “reached” language was new and seems to be a clear indication that ECB is done raising rates.
Meanwhile, the inflation data from Europe this morning was disinflationary. Germany August Final PPI came in at -12.6% Y/Y and U.K. August CPI was lower than expectations at +6.7% Y/Y and at a 18-month low. The reaction to U.K. CPI was immediate with the BOE funds futures market now pricing in a 50/50 chance of a hike tomorrow as compared to an almost guarantee earlier in the week.
Practically speaking, there is one thing that could throw this rate hiking pause stuff into question . . . oil prices. While there are many nuances to the global oil market and it is unique that the oil is going up in the face of a strong dollar, the data is sending us a clear signal.
Whether it be the fact that the Strategic Petroleum Reserve is now at a 40-year low in terms of storage or global oil inventory in aggregate is down Y/Y, the oil market is tight. The irony of the Fed taking a more dovish stance and risking weakening the dollar is that a weak dollar, if longer term history is any guide, could become a tailwind to the prices of those barrels denominated in U.S. dollars and further accelerate inflation.
At the moment, these are out Top Ranked Macro ETFs given the macro backdrop:
- FDRXX, TBIL, TFLO, XOP, UUP, INDY, XLE, PSCE, SCJ, INDA, PEY, EWJ, SMIN, UGA, XLG, AMLP, INFL, EWJV, URNM, GLD, AAAU, NLR, NVIR, USO, PFIX, URA, JPXN, IAK, SQQQ
Long inflation, interest rate volatility, and countries with favorable Quad setups continue to pervade our views.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 30yr Yield 4.31-4.46% (bullish)
UST 10yr Yield 4.21-4.39% (bullish)
UST 2yr Yield 4.93-5.11% (bullish)
High Yield (HYG) 74.34-74.94 (bearish)
SPX 4 (bearish)
NASDAQ 13,532-13,950 (bearish)
RUT 1 (bearish)
Tech (XLK) 167-174 (bearish)
Energy (XLE) 89.75-93.21 (bullish)
Utilities (XLU) 61.36-65.35 (bearish)
Shanghai Comp 3074-3153 (bearish)
Nikkei 32,598-33,655 (bullish)
BSE Sensex (India) 66,252-68,316 (bullish)
DAX 15,594-15,899 (bearish)
VIX 13.09-16.30 (neutral)
USD 104.41-105.40 (bullish)
CAD/USD 0.731-0.747 (neutral)
Oil (WTI) 86.07-91.96 (bullish)
Oil (Brent) 89.24-95.11 (bullish)
Gold 1 (bullish)
Copper 3.66-3.84 (neutral)
AAPL 171-181 (bearish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
