Today is a big day for the stock market. We’ll hear from the U.S. Federal Reserve for the first time since last week’s shockingly hot inflation print.
Make no mistake. What the Fed says today will determine stocks’ trajectory over the next month. A more hawkish-than-expected Fed commentary will accelerate the current market selloff. And a more dovish-than-expected Fed will turn this selloff into a face-melting rebound.
So… which will we get — a friendly, market-saving Jerome Powell, or a hawkish, stock-crushing one?
I think we’ll get the former. And that’s why I think stocks could be due for a strong near-term bounce starting today.
Hawkish Expectations for the Federal Reserve
Going into today’s FOMC press conference, stocks are fully loaded for a maximally hawkish Fed.
For starters, the market has dropped about 10% since last Friday’s inflation print. And stocks have plunged into a bear market. Clearly, stock investors are preparing for the worst.
Meanwhile, bond investors even more scared. The 10-year has surged about 40 basis points since the print, bringing it to its highest level in 11 years. More remarkably, the 2-year has risen even more. And this has caused a drastic flattening of the yield curve that only tends to happen during aggressive rate-hike cycles.
In the futures market, it’s more of the same. A week ago, no one thought a 75-basis-point hike from this Federal Reserve meeting was on the table. Today, the futures market is virtually guaranteeing it with a 96% chance.
In other words, from stocks to bonds to the futures market, all are bracing for a maximally hawkish Fed today.
That makes for good odds that the Federal Reserve under-delivers on the hawkishness and sounds more dovish than expected. If so, we could see a huge post-Fed bounce in markets that starts today and lasts for a few weeks.
Powell Doesn’t Like Surprises
One of the reasons we believe the Fed won’t provide a hawkish surprise today is because Jerome Powell, the committee’s chair, hates surprises.
He’s been the Fed chair for years now. During his tenure, he’s consistently preached one thing — communication. That is, he firmly believes in providing open communication to the markets so as to appropriately telegraph Fed policy decisions ahead of time and not provide any surprises or shocks.
He’s adamant on this. To that end, we find it very hard to believe he’ll “shock” the markets with more hawkish-than-expected commentary today.
He and fellow members have been consistently preaching 50-basis-point hikes at both the June and July meetings. Clearly, the Federal Reserve will likely hike 75 basis points today and guide to a potential 75-basis-point hike in July. So, that’s already two “shocks” that it plans to deliver today.
Do you think the guy who hates surprising the markets will really deliver more than two today? Unlikely.
Instead, he’ll likely do exactly what the market is expecting and hike 75 basis points. He’ll say another 75-bip hike is on the table for July and that the committee will look at the data. Then he’ll leave the door open for bigger rate hikes in the last few meetings of the year.
If he does that, then today’s meeting could shape up to be a “sell-the-rumor, buy-the-news” event. And we should get a post-Fed relief rally in stocks.
The Final Word on the Federal Reserve
The central bank could come out and shock the world today with a 100-basis-point hike. We find it unlikely. But it’s certainly possible.
But at the end of the day, it doesn’t really matter if it hikes 50, 75 or 100 basis points. What it’s trying to do is get inflation under control, and eventually, it will. Once it does, stocks will start to rise again.
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On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.