Wall Street Breakfast: Fed Evolution

Fed evolution - The Federal Reserve avoided a shock to equities in an already weak September, but will investors remain comfortable with the hawkish tilt?As expected from its decision yesterday, members pulled forward rate-hike expectations on the dot plot. And Fed chief Jay Powell telegraphed a tapering announcement at the next meeting in November. Tapering is expected to end around mid-2022 and liftoff could occur after that, although 2023 still seems the most likely timing for the start of rate hikes for now."What is clear is that inflation is likely to be the determining factor for liftoff and the pace of rate hikes," Deutsche Bank Chief U.S. Economist Matthew Luzzetti writes in a note. "If inflation is at or below the Fed's current forecast next year of 2.3% core PCE, liftoff is likely to come in 2023, consistent with our view. However, if inflation proves to be higher with inflation expectations continuing to rise, the first rate increase could well migrate into 2022."Scott Ruesterholz, portfolio manager at Insight Investment, is expecting a gradual liftoff and notes the Fed "is expecting inflation to run above 2% through 2024 even as they keep rates below their neutral 2.5% estimate." "That shows how committed they are to fostering as strong of a labor market recovery as possible." But was also the discussion and debate about asset purchases and how to communicate a taper within the FOMC and the markets a waste of energy?"All the time spent deliberating on prospective tapering, and the hours of market-participant focus on it, could be much more efficiently spent elsewhere," Rick Rieder, BlackRock CIO of Global Fixed Income writes. "We have argued for some time now that the economic conditions were ripe for a more normalized monetary policy, and that this, in fact, could mitigate the possibility for rising unintended consequences that could risk undermining the recovery that the Fed helped to engineer."Yesterday "we learned a bit more about the extremely deliberate evolution at the Fed, which now seems to be moving similarly to some other developed market central banks (Bank of Canada, Bank of Korea and the Bank of England) to take the first steps toward normalizing policy in the wake of the pandemic," Rieder adds.Stock rise, yield curve flattens: The broader stock market had a choppy reaction to the Fed yesterday, finishing solidly up, but well off the highs of the day. Investors look to be balancing the positives of the central bank dealing with inflation with the negatives of removing accommodation, even with rates still at zero.Still, the S&P (SP500) (NYSEARCA:SPY) has a chance to finish the week higher with two strong sessions. It's currently 37 points off the flatline and futures (SPX) are up more than 0.5%. The 10-year Treasury yield (NYSEARCA:TBT) (NASDAQ:TLT) is flat at 1.33% and the yield curve flattened yesterday, with short-term rates moving up (NYSEARCA:SPTS) (NASDAQ:VGSH)."So the market seems to believe the more hawkish the Fed gets the more likely they'll control inflation and/or choke the recovery," Deutsche Bank's Jim Reid says. "The puzzle is that even if the dots are correct, real fed funds should still be negative and very accommodative historically for all of the forecasting period. As such the market has a very dim view of the ability of the economy to withstand rate hikes or alternatively that the QE technicals are overpowering everything at the moment."But Ruesterholz notes "an economy benefiting from very accommodative policy with significant excess savings," and says "markets continue to benefit from a 'wall of cash' looking to buy dips and find yield." (7 comments)

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Top News Fed evolution Shutterstock The Federal Reserve avoided a shock to equities in an already weak September, but will investors remain comfortable with the hawkish tilt? As expected from its decision yesterday, members pulled forward rate-hike expectations on the dot plot. And Fed chief Jay Powell telegraphed a tapering announcement at the next meeting in November. Tapering is expected to end around mid-2022 and liftoff could occur after that, although 2023 still seems the most likely timing for the start of rate hikes for now. "What is clear is that inflation is likely to be the determining factor for liftoff and the pace of rate hikes," Deutsche Bank Chief U.S. Economist Matthew Luzzetti writes in a note. "If inflation is at or below the Fed's current forecast next year of 2.3% core PCE, liftoff is likely to come in 2023, consistent with our view. However, if inflation proves to be higher with inflation expectations continuing to rise, the first rate increase could well migrate into 2022." Scott Ruesterholz, portfolio manager at Insight Investment, is expecting a gradual liftoff and notes the Fed "is expecting inflation to run above 2% through 2024 even as they keep rates below their neutral 2.5% estimate." "That shows how committed they are to fostering as strong of a labor market recovery as possible." But was also the discussion and debate about asset purchases and how to communicate a taper within the FOMC and the markets a waste of energy? "All the time spent deliberating on prospective tapering, and the hours of market-participant focus on it, could be much more efficiently spent elsewhere," Rick Rieder, BlackRock CIO of Global Fixed Income writes. "We have argued for some time now that the economic conditions were ripe for a more normalized monetary policy, and that this, in fact, could mitigate the possibility for rising unintended consequences that could risk undermining the recovery that the Fed helped to engineer." Yesterday "we learned a bit more about the extremely deliberate evolution at the Fed, which now seems to be moving similarly to some other developed market central banks (Bank of Canada, Bank of Korea and the Bank of England) to take the first steps toward normalizing policy in the wake of the pandemic," Rieder adds. Stock rise, yield curve flattens: The broader stock market had a choppy reaction to the Fed yesterday, finishing solidly up, but well off the highs of the day. Investors look to be balancing the positives of the central bank dealing with inflation with the negatives of removing accommodation, even with rates still at zero. Still, the S&P (SP500) (NYSEARCA:SPY) has a chance to finish the week higher with two strong sessions. It's currently 37 points off the flatline and futures (SPX) are up more than 0.5%. The 10-year Treasury yield (NYSEARCA:TBT) (NASDAQ:TLT) is flat at 1.33% and the yield curve flattened yesterday, with short-term rates moving up (NYSEARCA:SPTS) (NASDAQ:VGSH). "So the market seems to believe the more hawkish the Fed gets the more likely they'll control inflation and/or choke the recovery," Deutsche Bank's Jim Reid says. "The puzzle is that even if the dots are correct, real fed funds should still be negative and very accommodative historically for all of the forecasting period. As such the market has a very dim view of the ability of the economy to withstand rate hikes or alternatively that the QE technicals are overpowering everything at the moment." But Ruesterholz notes "an economy benefiting from very accommodative policy with significant excess savings," and says "markets continue to benefit from a 'wall of cash' looking to buy dips and find yield." (7 comments)       Trending Evergrande climbs Evergrande (OTCPK:EGRNF, OTCPK:EGRNY) is rallying in Hong Kong, with the market open after a holiday, but shares eased off an earlier spike. The People's Bank of China put 120B yuan ($18.6B) into the banking system through reverse repo agreements, the net injection is 90B yuan, according to Bloomberg. But there is still some uncertainty about the property company's dollar-denominated debt payments. (8 comments)       Another billionaire divorce Described as 'epic' by Page Six, hedge fund manager John Paulson is headed for divorce, joining a list of high-profile billionaires, like Bill and Melinda Gates, and Jeff Bezos and Mackenzie Scott in seeing their nuptials come to an end. Paulson rose to fame for his bet against the housing market preceding the financial crisis, making billions for himself and his investors. After the assets under management dwindled in the ensuing years, Paulson announced earlier this year that his fund, Paulson & Co. would be turning into a family office, thereby returning outside capital. That said, his fund still owns sizable assets in the financial markets, and, given the fact that he and his wife did not have a prenup, according to Page Six, it may prove challenging to divide assets cleanly. (199 comments)       Sponsored Ray Dalio Says "Cash Is Trash," Here's What He Says to Do With It The founder of the world's largest hedge fund warns investors with $250K in cash to "diversify now." With rising inflation and extraordinary stimulus, Dalio urges people to invest across more asset classes. His recommendation? Alternative assets, like art. Why? Contemporary Art has outperformed safe-haven assets like gold and real estate by nearly two-fold (95-20). He's not alone: 61% of the ultra-wealthy allocate heavily to art. Steve Cohen invested $1B of his net worth in Contemporary Art. Now you can too. We teamed up with Masterworks.io, a platform that lets you invest in the type of art collected by Marc Andreesen, Jeff Bezos, and Bill Gates. Wall Street Breakfast readers get priority access* *See important disclosures Tech Cathie Wood on bubbles Cathie Wood, CEO of ARK Investment Management, points out that the five technologies - DNA sequencing, robotics, energy storage, artificial intelligence, and blockchain technology - that her firm focuses on are evolving together. She argues that disruptive tech companies are not in a bubble. "I think what the market is missing is the convergence among platforms," she said at a Morningstar Investment Conference session. And that convergence of the tech platforms is particularly good for Tesla (NASDAQ:TSLA) since it incorporates three of them: energy storage, artificial intelligence and robotics. (176 comments)       Facebook falls Facebook (NASDAQ:FB) dropped 4% yesterday after an out-of-cycle update on advertising performance on its business blog, acknowledging issues that advertisers are encountering with the new Apple iOS update.

"We've heard from many of you that the impact on your advertising investment has been greater than you expected," Product Marketing VP Graham Mudd says. "The cost of achieving your business outcome may have increased and it's also gotten harder to measure your campaigns on our platform." Some of that is due to underreporting, he says, adding that "we believe that real world conversions, like sales and app installs, are higher than what is being reported for many advertisers." (121 comments)

     

Covid

Booster shots

The FDA has granted Emergency Use Authorization for a booster dose of Pfizer (NYSE:PFE)/BioNTech's (NASDAQ:BNTX) COVID-19 vaccine for those 65 and older, those who work in healthcare settings, and adults at high risk of severe COVID-19.

The authorization includes people whose "frequent institutional or occupational exposure to SARS-CoV-2 puts them at high risk of serious complications of COVID-19." The agency said individuals in these groups can get a booster dose as long as it has been at least six months since they received a second shot. (10 comments)

     

Today's Markets

In Asia, Japan Closed. Hong Kong +1.0%. China +0.38%. India +1.39%.
In Europe, at midday, London +0.52%. Paris +1.06%. Frankfurt +1.07%.
Futures at 6:20, Dow +0.71%. S&P +0.73%. Nasdaq +0.71%. Crude +0.06% at $72.27. Gold -0.6% at $1768. Bitcoin +3.6% at $43862.
Ten-year Treasury Yield +5 bps to 1.335%

Today's Economic Calendar

8:30 Initial Jobless Claims
8:30 Chicago Fed National Activity Index
9:45 PMI Composite Flash
10:00 Leading Indicators
10:30 EIA Natural Gas Inventory
11:00 Kansas City Fed Mfg Survey
4:30 PM Fed Balance Sheet

Companies reporting earnings today »

What else is happening...

FireEye (NASDAQ:FEYE) to relaunch as Mandiant in October.

Facebook (NASDAQ:FB) tech chief to exit role; Hardware head taking over.

U.S. crude (CL1:COM) stockpiles post seventh straight weekly decline.

Will Nike (NYSE:NKE) overcome its Vietnam, China issues and post Q1 earnings surprise?

Remittances provider Remitly (NASDAQ:RELY) prices IPO above range at $43.

Crypto mining firm Argo (ARBK) prices 7.5M-ADS IPO at $15.

Identity verification provider Sterling (NASDAQ:STER) prices 14.3M-share IPO above range at $23.

Equinor (NYSE:EQNR) a likely winner from surging European natural gas prices, HSBC says.

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