Markets are betting the Federal Open Market Committee will hike by 75 basis points Wednesday and signal rates are heading above 4% and will then go on hold. While a case can be made for going bigger, a shock 100-basis-point hike could add to recession jitters. Meantime, the long hold strategy is rooted in the idea the Fed would avoid the disastrous stop-go policy of the 1970s that allowed prices to get out of hand.
“We think a 100 bps hike would unnerve Wall Street, as it would imply that the FOMC is overreacting to the data rather than sticking to its game plan,” said Sam Stovall, chief investment strategist at CFRA Research.
Short-term Treasury rates have exceeded yields on longer maturities for months, in a time-tested harbinger of an economic downturn. The MLIV Pulse survey, which drew 737 responses, showed that the bulk of contributors expect further inversion. Some see it reaching levels last seen in the early 1980s, when Paul Volcker ratcheted up borrowing costs to break the back of hyperinflation.
After a hotter-than-expected inflation print and FedEx Corp.’s shocking profit warning last week, top Wall Street strategists see mounting risks for stocks.
Both Morgan Stanley’s Mike Wilson and Goldman Sachs Group Inc.’s David Kostin said headwinds to profitability are building, highlighting tighter monetary policy and pressure on company margins as key concerns. Wilson said “there is still a long way to go before reality is fairly priced.”
All four companies looking to sell fresh debt in the US investment-grade primary market on Monday stood down as issuers face mounting borrowing costs and faltering market sentiment. Syndicate desks expected most issuers to pass following a rough open in the US and markets being closed in the UK and Japan.
Traders also kept a close eye on the latest geopolitical developments, with President Joe Biden saying US military forces would defend Taiwan from “an unprecedented attack,” his latest pledge of support as his administration seeks to deter China from increasing military pressure on the democratically elected government in Taipei.
Key events this week:
Stocks
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Business Maverick
Stocks See Fickle Trading in Pivotal Fed Week: Markets Wrap
Stocks whipsawed as traders geared for another super-sized US rate hike amid mounting fears on whether the Federal Reserve could overtighten and raise the odds of a hard landing.
