Stocks Jump On The Fed’s Super Dovish Outlook, But It Could Be A Trap

Stocks finished the day higher after a volatile session following the FOMC announcement. The S&P 500 was down nearly all day as rates rose on the 10-Year, but that changed after the Fed announcement. The Fed’s statement and guidance were in-line with what they had been saying all along; they plan to let the economy run hot and not raise rates until they reach their outcome-based goals. Equities took this as a cue to rally, and they did, with the S&P 500 finishing the day higher by 30 bps, to close at roughly 3,975. This continues to be the upper end of my range; I have been using the futures, saying a range of 3950-3960, the futures were trading at 3,962 at the close.

I am not surprised that the market rallied on the news; in fact, I pretty much said the Fed would move to appease the equity market and that stocks would likely rally. But this is a sign that Powell wants the economy to run hot, and Powell is all but daring the bond market to push rates even higher, and the bond market may take him up on that.

Dollar

The dollar is clearly worried about inflation, as it plunged today after the announcement, dropping all the way back to 91.50 on the dollar index.

I sense that rates on the long-end have much further to climb, even if there is no inflation or low inflation. After all, Tip yields are still negative 65 bps; they had only traded this low one other time back in 2012. It would seem at this point; we are not likely to enter a deflationary period. I don’t see why the 10-year TIP yield can’t push back to say 0%, which would imply that the 10-year rises to around 2%, maybe 2.25%. I don’t see why the 10-Year TIP should continue to trade at a negative rate when the Fed targets a PCE to start coming in north of 2%.

The chart on the 10-Year Tip would suggest higher rates are likely coming.

The thing is, on the surface, it is hard to see how higher rates have already started to play out in the equity market, but they have. Just look at any of your favorite growth or technology stocks; most are down significant amounts.

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

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