This market faces a lot of problems, but I don't think that the Fed is one.
Yes, we get a Fed meeting this week.
Yes, the Fed's Summary of Economic Projections (SEP) will highlight higher for longer; there is almost no possibility of anyone lowering their dots from the last SEP given some of the recent inflation projections.
However, will the Fed nudge the terminal rate higher? It certainly cannot lower the terminal rate given the economic data released since the last meeting, but will it raise it? Possibly.
Fed Chairman Jerome Powell will try to hammer home several points during his news conference. Among them:
*Higher for longer. This has been (and will continue to be) the main message that he wants to drive home.
*Not necessarily done with hikes. I don't expect a hike, but if he is going to try to hammer home the "higher for longer" message, he needs to keep more hikes on the table.
*Inflation concerns, with a hat tip to "sticky" inflation. I can't ignore the recent data, though it won't be enough to hike this time. Remember, inflation is called "sticky" for a reason, because policy makers know it takes a long time to respond to policy actions. It is why the Fed can downplay it somewhat.
*The central bank still has a 2% inflation target. Not sure anyone really believes that. Yeah, he would like it to keep moving to something two-ish, but he isn't desperate to get it down to 2% anytime soon. The message will be tough, but will anyone really believe him?
But what about yields?
The 2-year went from 4.85% after the Fed's July 26 meeting to 5.04% as of last Friday's close. The 10-year did even worse, jumping from 3.87% to 4.33%. That's almost a 50-basis-point move in the 10s.
There are many reasons that yields have been moving higher (supply, less foreign buying and a huge corporate calendar among them), but yields are much higher than they were, and I don't think Powell can sound hawkish enough to push yields significantly higher.
Yields, both nominal and real, are becoming a problem and the Fed is well-aware of that. It knows how long it takes for rate hikes to kick into effect, especially after companies and individuals locked in low yields for longer-than-normal maturities. But that is slowly starting to creep into borrowing costs.
I'm noticing pressure coming from small business lobbies into D.C. and that is fairly new in this cycle.
Meanwhile, oil increasingly is popping up on my radar screen. West Texas Intermediate (WTI) crude has been on a tear, going from $79 in late August to more than $90 last Friday. It was $95 last September, but it was on its way down.
I am not happy that we didn't refill the Strategic Petroleum Reserve when we had the opportunity. I will keep a close eye on oil; I'm also wondering if growth in India, not domestic demand or some China rebound, is fueling oil demand?
Bottom line
I still like rates and equities, but I am worried that I'm threading the needle too closely. I am betting that the Fed and some "bad news is good news" reports will spark a rally as the problems facing risk assets start to mount.
