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The good news is that stocks are a little less expensive than they were Wednesday morning.
The bad news? Well, the US’s major indices puked yesterday, with the S&P 500 down almost 3 per cent and the Nasdaq Composite off 3.6 per cent. The real carnage happened in Alphaville faves like Carvana, GameStop, Tesla and MicroStrategy.
The latter two fell 8.3 per cent and 9.5 per cent respectively, sending the (very silly) leveraged ETFs based on them down by 15-20 per cent. Which almost feels like a narrow escape, given the size of yesterday’s reversal and the potential for the ETFs to blow up and smash their underlying stocks.
Blame the Federal Reserve’s “hawkish cut” for the mayhem.
While officials did cut rates, their median projection for core inflation (the important stuff) shows they now expect inflation to persist above their target next year. The median projection also called for fewer rate cuts, and Fed Chair Jay Powell said officials can “be more cautious as we consider further adjustments to our policy rate” in the future.
So, yes, it’s looking like next year will bring tighter Fed policy. And CME data shows that the market finds that credible. Futures are now pricing a fed funds rate around 4 per cent at the end of next year; that’s one to two cuts. Yesterday, consensus seemed to settle on two or more.
All of this apparently came as a surprise to investors and market watchers, including Standard Chartered’s Steve Englander:
We and the market were profoundly surprised by the hawkish tone of the changes in the FOMC’s economic projections . . . This was clearly a risk-off event . . .
Fed Chair Powell’s primary explanation for the shift was the higher core inflation readings of the last two months, although he indicated that some of the projections incorporated the expected impact of the incoming Trump administration’s policies. The raising of 2025 core PCE inflation from 2.2% to 2.5% was particularly striking — only three participants saw core inflation below 2.4% or lower, so no amount of rounding could bring the 2025 projection to target.
Over at TS Lombard, a different Steve (Steven Blitz) was taking a victory lap:
The market is in a snit because the Fed did not do what they thought but they did do what we expected all along — dropping the funds rate to the Taylor Rule 4.25% between Sep and year-end, and, until there is a material change in the economy, this is where rates are going to stay. I wrote this last July and again in September. Once inflation slipped under the funds rate and employment started to soften, knowing that inflation is the ultimate trailing indicator, the FOMC shifted back to a model-based determination of policy. Guidance about inflation or employment is a smoke screen.
Barclays argues that the Fed chair didn’t seem especially worried about broader economic strength in the press conference:
Powell did not focus on the case of deteriorating economic or labor market conditions, suggesting that FOMC participants have become less worried about downside risks than they were in September.
Anyway, stocks puked and frothier markets got whacked after the statement, with Bitcoin down almost 6 per cent for the day.
And yet . . . BTC futures were up a bit after that. So who knows? Thursday could be a good low-liquidity end-of-year test for our favourite arbitrary trading rule: Always fade the Fed. Or at least the immediate market moves on the day of its policy statements.
