I generally hate FOMC meeting days. Despite all the preparation you’ve done, most of us seem to spend the hours ahead of the decision at 2pm and the press conference at 2:30 second guessing everything. Staring at the tape trying to divine some information that you’ve missed. That isn’t made any easier in what has been an extremely volatile tape with intraday swings that are as violent and large as I’ve seen in a long time.
We will come back to the Fed in a moment, but there is a consensus, which I generally agree with, that Fed days tend to support risk assets. That whatever fears we have built up will be assuaged when Chair Powell finally addresses us.
Microsoft’s earnings hit the tape and the stock dropped almost 5% dragging the Nasdaq 100 futures down to almost the lows they hit on Monday (you had to be pretty quick to buy some here). The conference call turned Microsoft around and the Nasdaq 100 is back to almost where it started the week. On top of the Fed, we need to digest TSLA earnings tonight (2% of S&P 500, 4.2% of Nasdaq 100) and AAPL tomorrow (6.7% of S&P 500 and 12.1% of Nasdaq 100).
Capitulation or All-in?
I read a lot about how Monday was a capitulation event. It does have that feel and was a tradeable bottom (as was last night’s post close fiasco). I continue to try and sell rips and nibble at dips here.
Given my “traditional valuation matters” thesis, I am most concerned about the ARKK and QQQ type of stocks. It is particularly difficult to sort out what part of these moves is repricing in its own right and response to potential Fed action (for better or worse we will have clarity on the Fed in 6 hours or so).
If you strip out all the perma-bears taking victory laps, my stream was heavily skewed to those claiming to be buying the dip, that the bottom was in, etc. That was yesterday before we tested those bottoms again post close.
QQQ has seen outflows and had its first inflow in a couple weeks yesterday. Not quite capitulation, but certainly cautious and those flows mirror my view reasonably well. SPY has head steady outflows, including yesterday. I’m not as fixated on this, but it has now significantly outperformed QQQ and could fit the “sell what hasn’t moved down” theme.
ARKK on the other hand has seen a resurgence in flows. Shares outstanding gapped higher in the past few days and are now back to where they were in November when the decline in that fund started. Certainly showing that animal spirits are alive and well. Finally, TQQQ, had its biggest inflow in at least 3 years! While there have been inflows each and every day of late, the flows published on Tuesday were almost astounding. That is bordering on exuberance.
I would be much more comfortable not selling rips if we hadn’t seen some of those flows and if my social media streams seemed to be far less bullish.
The Fed - Today
In a nutshell, I think the Fed will focus on balance sheet management rather than rate hikes as their primary tool for combatting inflation in the coming months.
We should hear a lot of “data dependent” comments from the Fed today. They do not want to paint themselves into a corner. Much of what the Fed has been doing is to “jawbone” not only the markets, but also politicians.
I think initial reaction could well be positive. I think part of the overnight rally is just pricing in the generic view that the Fed won’t sound as hawkish.
Having said that, I think quantitative tightening, if that is indeed their preferred method, will weigh on risk assets over time.
Since the minutes came out I think the market has been driven more by balance sheet concerns than rate hike concerns.
So, talk back the 4 hikes, but focus on quantitative tightening is initially bullish for risk and then fades.
The more hikes or more QT the worse it goes.
If the Fed walks back QT and talks about that being a next year event, I’d immediately become much more “risk-on”.
The Fed – Over Time…
I expect the data to disappoint. Demand got pulled forward. Stimulus is ebbing. Policy from the Fed and from D.C. are far less encouraging. Geopolitical risk is accelerating. Lots of reasons to expect some hiccup in the data.
I think the politicians will learn that lack of jobs is way worse for being reelected than inflation.
Since politicians have played a role, in my opinion, in shaping the inflation needs to be crushed narrative, they will have a hand in reversing course if they see signs the economy is weakening. These people live soundbite to soundbite in some cases.
The Fed, which doesn’t live soundbite to soundbite, will be quicker to tone down the hiking rhetoric at first signs that inflation is slowing or, worse, the economy is slowing.
Unless the Fed is far more dovish than I expect, I think we see 2s move to gradually lower yields and then rapidly lower if the economy slows.
On 10s, I think we see a move to lower yields, part of a risk-off move (I think QT affects risk assets negatively which in turn drives bond prices, which seems weird since the buying is in bonds, but..). Then yields drift back towards 2% as people realize the Fed will always favor growth over inflation.
There may be a dual mandate, but it is heavily skewed to one side.
Two Very Big Narratives on a Collision Course
With all that said:
Mildly bearish to neutral on risk coming into the Fed since need to respect the propensity to pop (more bearish if we rally more ahead of the Fed).
QT or lack thereof will be my key trigger.
No QT or much delayed QT and the valuation thesis can be put off for another day.
With QT I think the selling pressure in those areas returns.
Good luck staring at the screens and waiting for the show to being at 2pm!