8 Monster Stock Market Predictions – The Week Of March 15 Edition

It will be a busy week for the market, especially with the FOMC meeting and press conference on Wednesday afternoon and the quadruple witching on Friday. With that, I would be rather surprised to see the continued rebound in stocks we saw last week.

The NASDAQ has been the weaker index, and that is because the higher rates on the 10-year are compressing multiples, while breakeven inflation rates are helping to drive the reflation trade. However, I do not think any of this will last, as the bond market will be broadly disappointed by the Fed’s actions this week, and that will send yields on bonds greater than 2 years in maturity higher. 

The bond market is trying to get to the Fed to respond to the higher-than-expected inflation readings coming out in recent weeks, and to this point, Powell has not been willing to respond. He is instead focused on maintaining the current monetary policy and driving inflation rates higher than 2%. However, the bond market believes inflation may become a problem and has been responding with rates on the longer end of the yield curve rising.

Investors have been steadily shorting the 10-year note, expecting rates to continue to rise. We know this because the repo rate on the 10-year note is negative, which indicates that the demand for borrowing the note is high.

The Fed appears to believe the recent rise in inflation readings as noted in the PPI will be transitory, which I believe too, meaning it will not last. But the bond market appears to think that these inflation rates may be more problematic, especially given the huge amount of stimulus coming. The Fed has indicated it wants inflation to run above 2% for some time before considering changing its current monetary policy.

I think it is unlikely that the Fed will make any comments regarding changes to its current monetary policy. As a result, the bond market may be unhappy with the results. This will likely send rates higher on the long-end of the curve, and Powell is likely not to be bothered as long as overall financial conditions remained orderly.

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Disclosure: Mott Capital Management, LLC is a registered investment adviser. Information ...

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