New Fed head honcho Jerome Powell will lead his very first FOMC press conference today since taking the reins from Janet Yellen.
Wall Street expects the Fed to raise interest rates today. But what matters (as always) is the tone and tenor in which it's delivered.
If Powell raises rates today, will the Fed's forward-looking expectations be interpreted as hawkish or dovish?
The market has placed its bet. Here's analysis from CEO Keith McCullough in a note sent to subscribers earlier this morning:
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If you sequence the rate of change in the 10s/2s UST Yield Spread, you’ll see that it hit its steepest point when US inflation expectations peaked in February – that makes sense because the long-end of the curve cares about the rate of change of inflation. Now, ahead of the Fed meeting, it has compressed back to +55bps and I think the bond market is telling Powell he should do a Dovish Hike. |
INFLATION EXPECTATIONS Are ROLLING OVER
Maintaining stable prices is one of the Fed's mandates (the other being stable employment). If inflation is rolling over, even mildly as we predict, that would be cause for concern for the Fed (which generally has an inflation target of 2%).
At the end of January, Wall Street consensus was overwhelming long of Oil and short of 10-year Treasuries (according to the CFTC’s futures and options positioning data). The positioning expressed a clear macro view: Investors were long inflation. In anticipation of inflation running hot and Fed hawkishness, the 10-year Treasury rose to 2.956% in February (a 4-year high).
Our call has been, and continues to be, that because of this one-sided positioning even modestly underwhelming inflation readings would cause a shake-up. "We’re talking about here is a mild rollover in inflation expectations,” McCullough explains in the video below (see "McCullough: 3 Market Risks I'm Watching Closely"). “But what you've got right now are Fed rate hikes expectations at their max." There’s money to be made when investor positioning is so extreme.
Case in point: The February CPI reading (reported last week) was largely flat but 10-year Treasury yields were off as much as 16 basis points last week from the February highs. Meanwhile, yield-sensitive sectors like Financials (XLF) sector fell -2.8% last week and Utilities (XLU) bounced +1.7%.
We continue to think this theme has room to run.
Want to learn more about the other two market risks (besides inflation) that could crack this bull market? Here you go...
[Webcast] McCullough: 3 Market Risks I’m Watching Closely
It’s been 9 years since this big bull market began.
The S&P 500 is up 305% since the March 2009 bottom—15% in the past year alone.
Our favorite pick over the past year (Technology) is up over 25% alone.
It won’t go on forever.
A number of imminent catalysts could crack this market.
Join Hedgeye CEO Keith McCullough for the no-punches-pulled, investing webcast above…
Keith discussed our evolving outlook for U.S. stocks, economy, corporate earnings, inflation and more.
Watch the replay above.
