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- More Rate Hikes May Come
For our beach investors… drink a Daiquiri and get paid. 1M today could be around an extra 50k in one year with less risk than trading.
These are the best rates you can find in the fixed-income markets:
C.D.s (New Issues): 5.45% (1-year term)
U.S. Treasury Bonds: 5.33% (6-month period)
U.S. Treasury Zeros: 5.18% (9-month period)
Agency/GSE: 5.86% (5-year period)
Corporate (Aaa/AAA): 5.57% (10-year term)
Corporate (Aa/AA): 5.65% (1-year period)
Corporate (A/A): 6.87% (10-year period)
Corporate (Baa/BBB): 8.96% (3-year period)
Municipal (Aaa/AAA): 4.43% (3-month period)
Municipal (Aa/AA): 4.56% (20-year term)
Municipal (A/A): 4.76% (20-year period)
Taxable Municipal: 5.79% (30-year period)
For our street investors… face the wall with A.I. sentiment analysis and adjust your trading for Today (June 14, 2023):
Market sentiment seems to tilt towards caution as the Fed's interest rate hike looms. Economists like Bob Michele, Global CIO at JP Morgan Asset Management, and DoubleLine Capital CEO, Jeffrey Gundlach, are worried about the potential repercussions on the economy and banking sector. While these fears may dampen SPY's trajectory, the impact on VIX could be multifaceted.
For SPY, the narrative of rising rates and concerns over an inverted yield curve could contribute to short-term volatility, potentially creating headwinds for the index. Although the S&P 500 has gained 14% since the banking crisis low in March, Gundlach's recommendation to increase allocations to high-quality bonds at the expense of equities could lead to a sell-off, affecting SPY negatively.
Mark Heppenstall’s views suggest a market on a precipice. If the stock rally continues, the Fed may expedite its tightening policy to curb inflation. This could result in a sudden market correction, negatively impacting SPY. However, Josh Jamner's perspective provides a counterbalance. The focus on company fundamentals over macro concerns could support SPY, as strong earnings expectations could offset macroeconomic headwinds.
Regarding the VIX, the confluence of factors such as inflation, interest rate hikes, and banking sector pressure could create an environment conducive to increased volatility. While increased rate hikes might not have a major economic impact (as stated by Jamner), the associated uncertainties could heighten market jitters, pushing VIX higher. However, a focus shift from macroeconomic to company fundamentals could potentially stabilize volatility, constraining the VIX.
In conclusion, both SPY and VIX will likely experience fluctuations due to the economic landscape. Trade cautiously, monitor incoming data and company earnings, and be ready to adjust positions based on emerging trends.
FOMC Sentiment Analysis
Despite the unfolding effects of previous tightening, Jerome Powell and the Federal Reserve remain open to further rate hikes within the year. Stressing the significant tightening over the past 18 months—totaling 500 basis points on the Fed funds target range—Powell recognized a long journey ahead to hit the Fed's 2% inflation target. The committee expects rates to climb higher, tied to continued employment strength. Powell outlined a "very tight" labor market, noting an increased participation rate and easing wage growth as signs of balance.
The Federal Reserve left the fed funds target range at 5.00% to 5.25%, although this doesn't necessarily signal the end of the tightening cycle. The Summary of Economic Projections (SEP) shows a median forecast for the fed funds rate of 5.6%, indicating the potential for two more 25 basis point hikes or one 50 basis point hike in 2023. Expectations for 2024 and 2025 were also raised, indicating less likelihood of a rate cut in 2023 and higher rates for an extended period in 2024 and 2025.
The market will be watching the July 25-26 FOMC meeting, which Powell has indicated is "live." As Powell put it, the destination of a sufficiently restrictive rate is closer, yet inflation risks remain to the upside. None of the FOMC participants expect a rate cut in 2023.
Impact on SPY and VIX:
Given the announcement and Powell's statements, we may see mixed effects on the SPY. Higher interest rates typically make borrowing more expensive, which could lead to lower corporate earnings and weigh on stock prices. However, the expectation of higher rates reflects the strength of the economy, which can be supportive of equities.
In the shorter term, the uncertainty surrounding the future of monetary policy might lead to increased volatility, causing a rise in the VIX. The potential for further rate hikes later in the year introduces unpredictability to the market. That being said, if the Fed's monetary policy adjustments effectively curb inflation without hindering economic growth, this could decrease volatility over the long term, subsequently pushing the VIX lower.
