Market pricing in MORE rate hikes. But is it overreacting?
FED hiked last week to 3.75-4% (first hike in 3+ years). Their own dot plot shows ONE more hike this year. Only 4 of 18 members see two.
Yet the market is pricing:
• 70% chance of October hike
• 55% chance of TWO hikes by year-end
Market expects MORE tightening than the FED itself.
Why this could be wrong:
Bonds are doing the heavy lifting already. 30Y hit highest yield in 19 years. 2Y at 4.9%. Higher yields = expensive mortgages, loans, credit. Economy slows WITHOUT the FED touching anything.
The real alpha: Core inflation (ex food/energy) is at 2.4%. Last 3 months running at 2% annualized - literally the FED's target.
September 2024: Powell CUT 0.50% with core at 3.2%
Today: Warsh running the show with core at 2.4%
So where's the 3.4% headline CPI coming from? Oil.
Gas up 27% YoY. Heating oil up 52%.
Rate hikes don't fix oil prices. The FED can't drill more barrels. If this was domestic demand-driven inflation, different story.
If core stays cool, those two hikes the market is pricing might never come. When expectations reset, bonds/equities/crypto rip first.
FED hiking twice more or is the market front-running itself into a dovish surprise?
FED hiked last week to 3.75-4% (first hike in 3+ years). Their own dot plot shows ONE more hike this year. Only 4 of 18 members see two.
Yet the market is pricing:
• 70% chance of October hike
• 55% chance of TWO hikes by year-end
Market expects MORE tightening than the FED itself.
Why this could be wrong:
Bonds are doing the heavy lifting already. 30Y hit highest yield in 19 years. 2Y at 4.9%. Higher yields = expensive mortgages, loans, credit. Economy slows WITHOUT the FED touching anything.
The real alpha: Core inflation (ex food/energy) is at 2.4%. Last 3 months running at 2% annualized - literally the FED's target.
September 2024: Powell CUT 0.50% with core at 3.2%
Today: Warsh running the show with core at 2.4%
So where's the 3.4% headline CPI coming from? Oil.
Gas up 27% YoY. Heating oil up 52%.
Rate hikes don't fix oil prices. The FED can't drill more barrels. If this was domestic demand-driven inflation, different story.
If core stays cool, those two hikes the market is pricing might never come. When expectations reset, bonds/equities/crypto rip first.
FED hiking twice more or is the market front-running itself into a dovish surprise?
