The Fed raised rates this week, and I don’t think that surprised many. Kevin Warsh’s message at Jackson Hole, and again at the press conference, was clear. The Fed aims to tighten financial conditions to bring inflation back to its goal. That has implications for the S&P 500, which has been holding near its highs.
That matters because of what happened in the last hiking cycle. Financial conditions began easing in the fall of 2022 and never really stopped, which is why stocks rose even as the Fed was raising rates. I think this time is different. Markets are substantially higher, financial conditions are easy, and Treasury net issuance is set to pick back up in October.
Some of the effects are already showing up beneath the surface. Rates have been rising, breadth in high-yield bonds has been deteriorating, and breadth measures for NYSE stocks look more like late 2021 heading into 2022 than anything else. With the reverse repo facility practically drained, there is also less of a cushion to absorb new bill supply.
I don’t think we’re quite there yet. The key sectors haven’t broken down, and credit hasn’t confirmed it. But once issuance ramps up in October, with the potential for another rate hike and the midterms lifting implied volatility, it could set up a choppy, maybe even very challenging, stretch.
In the video, I go through the charts and the levels I’m watching in rates, the dollar, the S&P 500, the Nasdaq, and credit.
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