BofA: All Our Clients Want To Know When The Fed Will Do A Surprise Rate Hike

With global equity markets now sprinting higher in a furious meltup to daily record highs, one which will most likely not end until the bubble finally bursts, destroying any shred of credibility the Fed and fractional reserve banking have left (while leading to brisk sales of pitchforks) but not before generating countless headlines such as these...

... we said - following Bill Dudley's surprisingly hawkish speech yesterday - that the odds of a surprise rate hike under Jerome Powell are now especially high.

This morning, Bank of America's Michael Hartnett, in his weekly Flow Show report, touches on this growing possibility, specifically of when, and what level in the S&P, will the Fed engage in a surprise rate hike. Here is BofA:

SPY me to the Boom: #1 FAQ is "what level of bond yields will cause equity markets to fall?"; better question is "what level in SPX causes Fed to start hiking 50bps"

Well, judging by Thursday's close, it's not 2767, which is why Hartnett reminds clients of what BofA's Q1 targets are: SPX 2860, CCMP 8000, GT10 2.85%, EUR 1.10.

Arguably, that's where the Fed will wake up and realize that it has blown its third consecutive, and biggest ever bubble, something which another Bank of American, Barnaby Martin, pointed out two months ago:

"the irony in today's world is that central banks are maintaining loose monetary policies to generate inflation…in order to ease the pain of a debt "supercycle"…that itself was partly a result of too easy (and predictable) monetary policies in prior times."

Or maybe not, and the Fed will just keep pushing risk assets higher and higher as the alternative is nothing short of violent social conflict.

Meanwhile, judging by the fund flows in the first week of the year, it is clear that investors are fully confident that the Fed will never pull away the punchbowl: as Hartnett explains, it's a "maximum bullish barbell boom" in which  "the new year kicked off with blockbuster $24.4bn inflows into equities, the 6th largest equity inflows on record (split between $21.7BN in ETFs and $2.7BN in mutual fund inflows), and big $13.7bn inflows into corporate & EM bonds - the largest in 31 weeks - which the BofA strategist calls "the beginning of the bull capitulation."

Some other fund flows details:

  • 2nd largest week ever of inflows into EM debt ($3.6BN)
  • 2nd largest inflows into tech ($1.3BN)

 

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  • Biggest inflows into HY bonds in 48 weeks ($1.5BN)
  • largest 6 week inflows into energy in 3 years; largest inflows into energy in 57 weeks ($1.1BN)

 

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  • investors double down on bull market leadership; funds investors chasing laggards too

 

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Looking at Bank of America client indicators, Hartnett sees nothing but froth and euphoria:

  • Unambiguously long: BofAML Bull & Bear indicator jumps to 7.1 from 6.2, active equity funds finally seeing inflows, BofAML private client debt (22.5%) & cash (10.2%) allocations making new lows…investors are unambiguously long and will likely stay so until rates go up and/ or EPS goes down.
  • Tick-tock: triggering B&B indicator "sell signal" requires Jan'2018 FMS cash levels <4.3% (released Tuesday) + $15bn inflows into HY + EM equity + EM debt next 3 weeks; peak Positioning on its way but we expect asset prices to overshoot first.

 

 

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What happens next? According to the BofA strategist there are two "great" trades on deck:

  • The Great Tapering: BoJ & ECB clearly saying they will soon join Fed and start tapering the $12tn of asset purchases since Lehman; only government bonds care thus far; US Treasuries (-2.4% total return) on course for worst January since 2009; but tapering without inflation = flatter yield curve not bond shock.
  • The Great Bond Bear: if ultimate destination for a bear market in Treasuries is 10-year yield <3% then greed in credit & equities will continue to trump fear;

Finally, according to Hartnett, should the Fed not get involved, just two things can stop the party and prevent a risk asset overshoot in early 2018: wage inflation & >3% yields, and/or trade war (EPS -ve). Everything else is noise.

Comments

chubbar Don Sunset Fri, 01/12/2018 - 10:50 Permalink

OK, so doesn't a large, surprise rate hike by the fed accomplish the same end result that allowing this blowoff to continue, only to crash on it's own, also accomplish? I don't see why anyone would think the FED would intentionally out itself as the cause of the big event when it can sit back and let it happen without intervention? Seems like anytime "they" want the market to crash they can stop their interventions to prop it up, which we see on a weekly basis if not daily.

BTW, "they" intervened in the gold/silver markets at 8:30am with selling over 12,000 contracts in less than a minute yet gold/silver are still up fairly strong for the day. The interventions are becoming less and less effective in that market. A year ago those markets would be strong down for a couple of days, now they brush that shit off like a pesky mosquito. Shit is getting ready to hit the fan, IMO.

In reply to by Don Sunset

IH8OBAMA Slomotrainwreck Fri, 01/12/2018 - 11:04 Permalink

"....Bank of America's Michael Hartnett, in his weekly Flow Show report, touches on this growing possibility, specifically of when, and what level in the S&P, will the Fed engage in a surprise rate hike."

It's the ECONOMY stupid.  And economic/inflation data.  It's not the level of the stock market.  How does this idiot keep his job being so ignorant?

 

In reply to by Slomotrainwreck

Cash2Riches Don Sunset Fri, 01/12/2018 - 12:03 Permalink

At this point, it is QE to infinity, unless the FED is willing to cause a massive shyte storm. The reasoning why they would do this at this point? To take down Trump and blame a collapse on him. This latter reason is not out of the realm of possibilities and something we need to be on guard for.

 

http://jimrickards.blogspot.com/2018/01/james-rickards-powell-will-do-e…

In reply to by Don Sunset

Albertarocks Easyp Fri, 01/12/2018 - 11:23 Permalink

If they don't raise rates the inflation monster is going to rise up and become so obvious that the Fed will no longer be able to hide it with lies and tweaking of CPI, etc.  The Fed is starting to realize this.  The old wisdom that "the Fed always raises rates too little and too late" is more true today than at any other point in history.  Yet if they do raise rates (which I think they 'have to') investors will get broadsided big time.  The Fed knows this as well, but what can they do about it at this point?  Investors will just have to become the usual "collateral damage"... yet again.

Gold and silver investors won't get broadsided though because just as we saw in 1980, rates soared so high, so fast that mortgage rates hit 18%, and gold and silver soared right along with rising rates.  The commonly accepted theme that 'rising rates hurts gold' is just flat out false.  The reason... the Fed is *always* too late, they were behind inflation all the way back in the late 1970s and they're behind it today.  It's "real interest rates" that affect gold and silver.

If the Fed hikes again and surprises most of the investing world, those who are invested in gold, silver and miners will finally get what they deserve... filthy rich.  Just one more reason why JPM has accumulated the biggest store of physical silver in the history of the universe.  As much as I hate them, JPM knows exactly what they're doing, preparing for their own survival while they don't give a shit about the rest of humanity.

So as impossible as it seems, I think the Fed hikes.  They're finally firmly caught in a trap of their own making.

In reply to by Easyp

chubbar Albertarocks Fri, 01/12/2018 - 11:59 Permalink

It's rising REAL rates that negatively impact gold. Inflation adjusted rates are negative, giving gold, with no yield, a positive rate of return. This of course in a world where there is no central bank intervention to control the price of gold. The money causing inflation has already been printed and the rates can't ever go back to where they will impact gold because every gov't in the world would quickly be insolvent just from paying interest. Removing the money from circulation causes the great crash, so that's out.

What has been happening these past years is the margin between keeping gold in check with interventions and central banks' ability to keep interest rates low (negative real rates) has been narrowing. Substantially raising interest rates is impossible and having higher REAL rates is the only organic way to keep the price of gold in check, so soon the interventions become impossible because of the overwhelming move of smart money into this hedge, which is happening. Guess what happens then.

In reply to by Albertarocks

Albertarocks any_mouse Fri, 01/12/2018 - 13:40 Permalink

That is true, for those who are listening.  Of course, 98% of retail investors don't follow the market and aren't listening.  They just trust their pension fund managers.  Big mistake.  In any case, if the Fed gives honest hints (which I think they want to do), then those who are listening have a great chance of getting out in time and ending up having done very, very well for themselves.  I don't think the Fed wants to absoltely broadside investors in a cruel and malicious way.  I hate them with a passion but I'm quite sure they don't really want to operate with 'that much' malintent.

But you're right.

In reply to by any_mouse

TeethVillage88s Fri, 01/12/2018 - 10:34 Permalink

Rothschild - "Greatest Economic Experiment in History"

- Me too, 10 Years of ZIRP/LIRP/NIRP, QE Infinity, Corporate Bailouts, State Capitalism

WTF?

Where are the Bond Vigilantes, Pension Funds, Insurance Companies, Trusts & Foundations who should be complaining?

MusicIsYou Fri, 01/12/2018 - 11:37 Permalink

Here I'll answer the question: when will the Fed do a rate hike? When the Fed determines the population is losing faith in their currency the Fed will raise rates to cause pain on millions of people so they see the value of the dollar. And then when their standard of living decreases they'll see the value of the dollar, because with their brain dead thinking they'll think how they wish they had more dollars. Essentially the entire population is niggers and the Fed whips those niggers with a standard of living. If you don't want a real answer you shouldn't ask.

MusicIsYou Fri, 01/12/2018 - 11:55 Permalink

The Fed is  a plantation overseer whipping 100's millions of niggers with the dollar. When your standard of living decreases it's like a whip across your backside. I love this country. Of course since most people behave like worms, you're gonna get whipped like a worm.

Robert Trip Fri, 01/12/2018 - 12:13 Permalink

The 1930's Germans received one surprise too many from this lot and fortunately they had a leader that dealt with them.

Germany, without the shackles of usury returned to the great Nation it once was.

We, on the other hand,gladly obey THEIR every command with even our President going along for the ride.

And of course, it's only when you attempt to break free from them and their various schemes to rob you of your birthright do you realize how deeply they have their jackal claws into you.

Davidduke2000 Fri, 01/12/2018 - 15:24 Permalink

What rate hike?? they are total moron, the us  government alone pay over half trillion dollars interest per year on the national debt which is as of now $20.6 trillion, with each extra point it's another $260 billion to the spending which will balloon the deficit and the national debt.

However big time investors are only loaning to countries who pay more interest and would not loan the us unless interest go to 3 or 4 % or even more, so the us central bank is powerless to stop them.