The Treasury market is trading slightly higher this morning as stocks continue to weaken, pushing confused investors back into bonds. Don’t get too carried away with the buying; there isn’t a major spree at hand, but we could see an organized move in increasing size if equities continue to take it on the chin. One thing is for sure, it isn’t as easy today as it was a year ago. Even though the U.S. economy is chugging along at roughly the same pace it was a year ago, a few things of note have changed: 1) Wage inflation. Say what you will, even a slight uptick in wages is enough to get the long-end of the curve’s attention. 2) The Fed. This is a different Fed than the one that Janet Yellen chaired. The Fed Chair (Jay Powell) is more hawkish, and even the traditional “doves” are more hawkish than they were last year. The reason? Don’t look any further than item number 1. This version of the Fed isn’t looking to be accommodative. This version of the Fed wants and will raise rates to or above the “neutral” level, even if it hurts growth down the road. Based on the data, is the rout in bonds overdone? More than likely, yes, but the expectation of a Fed that wants to raise rates is here right now, and the market needs to deal with it. The “easy” trade is behind us and with volatility on the rise, we will have days where the bond and stock markets aren’t sure what they want to do, or when to do it. It is easy to find leadership in bull markets, but much more difficult when the questions about where we are headed exceed the answers to that same question. This is where the tougher and smarter start to rise up, and the weaker longs move either to the sidelines or wait until the clouds clear and the sun shines again. Any way you slice it, we are going to see this confusion until the Fed declares victory on inflation or tightens so much that the curve inverts and a recession follows shortly thereafter. The expectation of a rate hike by the FOMC in December is almost 80%, and over 70% that they would increase rates again in January. That would take the Fed Funds rate to 2.5% to 2.75%. That’s how long we may need to wait until the Fed either declares that inflation is tamed, and the neutral rate has been achieved. One thing seems clear to me; we have shifted to what is seen (the data), to what is unseen (future data), and the Fed currently holds most of the cards.
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