Tapping The Brakes

The doves were out Monday, and not a moment too soon for US equities which, despite a rousing two-day surge for the Nasdaq 100, were nevertheless relieved to close the book on a truly forgettable January.

The Nasdaq Composite came into the week on track for its worst opening month to a year in history. By the end of the session, the gauge was 3.4% higher, a ridiculous rally that spoke (rather loudly) to my weekend warnings about the perils inherent in pressing bearish bets with so much dry kindling scattered about.

The figure (below) is highly amusing.

You can thank a trio of Fed officials for that, including, ironically, Raphael Bostic. After signaling to FT last week that’d he’d support a 50bps rate hike at a single meeting, Bostic walked it all the way back Monday during an interview with Yahoo Finance’s Brian Cheung.

“So let’s get right into it. Over the weekend, you made some remarks to another news outlet talking about the possibility of a 50bps hike from the Fed,” Cheung said. “I guess I’m just wondering if you could kind of very quickly elaborate on whether or not you meant that’s your preferred policy setting for the next meeting in mid-March.”

Good question Brian! That’s a good way to tee up a rally. Or a grievous rout. Fortunately for stocks, Bostic told markets exactly what they wanted to hear.

“Let me just say first of all, that’s not my preferred setting for the next meeting,” he remarked, adding that,

When I started looking at this year, I had three rate increases in mind. And March increasingly was looking like it’s the right time to do that. But the other thing that I’ve been very mindful of, is that the economy has been a surprise to us and a surprise to the upside repeatedly in ways that have left me really just observing how the world works, and keeping my options open so I can adapt my policy to what the world tells me is happening. So I just think it’s really important for people to know that we’re not set — or I’m not set — on any particular progression in terms of policy. I’m going to let the data and the evidence really guide us in terms of what appropriate action might be.

Winner, winner! If you didn’t like FT Bostic, you’ll love Yahoo Bostic.

Mary Daly (bless her) was her predictably affable self during a livestream with Reuters. “I don’t want to predetermine [how many times rates will rise] because I really do see the two-sided risks we’re facing, and I want to be data dependent,” she said. “We have to have our options open, right?”

Right! Definitely right. Shouted the stocks.

“And if more is needed, more will be done,” Daly added. “If less is needed, less will be done.”

Right again!

Even Esther George was dovish. Or as dovish as Esther George is going to be. “You always want to go gradually, in the economy,” she told the Economic Club of Indiana. “It is in no one’s interest to try to upset the economy with unexpected adjustments.”

Crucially, George seemed to indicate the Fed might opt to use the balance sheet in order to mitigate the flattening impulse from rate hikes. One of the QT “principles” unveiled last week stipulated fed funds remains the preferred policy lever and Powell seemed especially keen on dispelling the notion that runoff could substitute for hikes. Maybe somebody looked at the curve between last week and Monday.

“Given the uniform nature of the Fed messaging on the heels of Powell’s press conference in which he left the door open for a 50bps hike, our read is that the Committee doesn’t want the market to get too far ahead of what monetary policymakers are prepared to deliver — i.e. 25 bp in March and a balance sheet runoff announcement this summer,” BMO’s Ian Lyngen and Ben Jeffery wrote. “It’s easy to critique the official communication strategy at a moment of such policy uncertainty, but to be fair, even the Fed doesn’t know how many hikes it will be able to deliver in 2022.”

Over the past two weeks, markets and, ultimately, Wall Street economists, appeared to box the Fed in, pressing bets and making 50bps in March seem like a foregone conclusion. Even if the data weren’t weakening, officials likely wouldn’t be comfortable with that. Monday’s rhetoric clearly suggested the Committee thinks markets are overzealous about prejudging the rate path — even if that judgment turns out to be correct.

“Sure, all else being equal, five hikes and balance sheet runoff in July fits with the present set of risks as currently known, but there is a lot of 2022 left,” BMO’s Lyngen and Jeffery went on to say.

Indeed there is. And, as I’ve argued consistently over the past week, a Fed that hikes five (let alone six) times in 2022 clearly runs the risk of engineering a shallow recession and is virtually guaranteed to invert the curve, likely to the chagrin of risk assets.

So, officials tapped the brakes on rates traders who were following a bit too closely. Two-year yields were still cheaper on the day, but just barely as rate-hike premium built early on evaporated. Of course, tapping the brakes on rate hike expectations was a green light for risk assets to mash on the accelerator.

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4 thoughts on “Tapping The Brakes

  1. H-Man, this entire scenario on hikes is liking watching the tide — it comes in, it goes out, it comes in, it goes out. It seems like March 18th is a few light years away. Meanwhile, back to watching the tide.

    1. But every few years there’s a major earthquake on a nearby (or far away) subduction zone, and then a major tsunami washes several miles inland and causes unbelievable destruction.

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