Since the extreme hawkish September Fed meeting on last Wednesday, the markets have been in shock. The 2-year and 10-year treasury yields have gone parabolic while the equities in every sector sold off hard. The DOW took out its June low while the S&P 500 and NASDAQ held their respective June low. The 10-year treasury yield gap opened to a 12-year new high last Friday, but it failed to continue to
The higher than expected CPI headline data released on last Tuesday September 13, 2022 squashed all hopes and dreams for the bulls. Now the persistent high inflation headline data will support the Fed to hike rates aggressively in the near term. The 10-year treasury yield is approaching a very important level at 3.50%. If the 10-year treasury yield breaks above the 3.5% ceiling, stocks and bonds will fall further at the same time.
The S&P 500 cash index hit its 61.8% retracement of the June low to August high rally on September 1st. Then after the Labor Day holiday the bears tried to crash the September 1st low again. The bears were only able to make a nominal low on September 6th and promptly reversed from the 61.8% retracement. This reversal is mainly short covering and completely technical, the macro conditions are still the same.
The Fed, the nation’s central bank, influences the business cycle by targeting inflation and unemployment with targeted rates. It uses tools designed to change interest rates, lending, and borrowing by businesses, banks and consumers. In September 2021 Fed meeting, the Fed labeled raging inflation as transitory and telegraphed the market that the Fed was not even thinking about raising rates in 2022. Guess what happened? The raging inflation was not transitory. The unforeseen Ukraine war exacerbated the inflation situation that forced the Fed to react with full force to raise the Fed funds rates by 75 basis points twice so far.
