Fed Looks For Tighter Financial Conditions; Good Luck Stocks
Michael Kramer | Mar 17, 2022 12:52AM ET
Stocks finished higher for the second day in a row, as traders looked to close puts into the final hour of trading, which led to a volatility melt. The options delta hedging action was positive, indicating traders were closing out SPX puts. The SPY and QQQ ETFs had negative delta hedging, suggesting that traders were buying puts and selling calls in those ETFs.
But really, the path of monetary policy the Fed laid out was for rates to be above the neutral rate in 2023 and 2024. That was more hawkish than even my hawkish expectations. From listening to Powell’s press conference, the Fed aims for tighter financial conditions, and those tighter conditions will lead to lower multiples and stock prices.
When financial conditions tighten, stocks go down. Financial conditions are already tighter today than in 2018; as they go higher, stocks will decline in value. So if you think the Fed said nothing yesterday, you are entirely wrong.
They indicated they wanted to raise rates to 2.8% for 2023 and 2024, which is above the neutral rate. They are telling us that they want financial conditions to tighten. Remember, do not fight the Fed; it works both ways.
Additionally, the difference between this rate hiking cycle and past rate hiking cycles is that now the economy is growing at an anemic pace; we are not at the start or early stages of an expansion; this expansion is slowing dramatically. Atlanta Fed is indicating that first-quarter growth is around 1.2%.
S&P 500
The S&P 500 was still very much in a downtrend, and the past 2 days looked very similar to the Jan. 28 and 29 rally, and the Feb. 24 and Feb. 25 rally. I don’t think there is much else here, then some put values getting burned up and closed out into yesterday's expiration date.
The two-year was up to 1.94% by day’s end and will need to go much higher than that if the Fed gets its target rate to 2.8% by next year. It is likely headed to 2.2% in the short term.
Get The News You Want
Additionally, the yield curve saw the 7-year rate move higher than the 10-year rate, and I suspect the 5-year will be moving higher than 10-Yr very shortly.
None of this should be bullish for stocks.
Original Post
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.