The S&P 500 was up 5.5% last week as rumors once again emerge of the infamous Fed pivot. We have seen a rerun of this movie several times this year, only to disappoint its viewers each time. Will this time be different when the Fed meets next week as they host the November FOMC meeting?
The market is pricing in about a 75-bps interest rate hike which is almost a done deal but it is the rate of change of future hikes that have the chance of being readjusted by the market. Could this be the last 75 bps hike followed by 50bps or even lower? The jury is out but one thing is certain, the data is nowhere close to showing that inflation has reached the Fed's 2% inflation target.
Even if the Fed embarks on a slightly lower interest rate increase in the future, the environment is one that is far from being an investable, risk free one that supports liquidity flowing to all risky assets. The Fed is still intent on withdrawing liquidity from the system in general.
US 10-year bond yields traded all the way to 4.3% as bonds, along with equities, puked as inflation remains the forefront of investors' minds. Given the surge in the dollar vs. the yen and yuan, there were suggestions that the Bank of Japan and PBOC needed to sell more US Treasuries to raise funds to then be able to support their currency, i.e. intervention.
But something changed this past week as US 10-year bond yields are now trading down to 3.90%, taking the dollar down and all risky assets up. Could the Fed be back in the market supporting the long end of the treasury curve? We shall wait and see what Jerome Powell has to say. They cannot come outright and say they would do more QE, as that would mean inflation would be cemented in the high single digits for life. It would be foolish. But something needs to be done as the bond, credit and FX markets have been extremely stressed for the past few weeks.
Credit Suisse (CS) was the main victim mentioned in the press a few weeks ago that it was suffering liquidity problems. After weeks of draining liquidity from the Fed reserves and offloading assets to raise funds, it has now come out and confirmed that it did indeed have liquidity problems.
The narrative may be false as it had nothing to do with the market but the level of risk these banks took - and the rate of change of the rates and bond prices - that caused margin calls which led to liquidity reserves being drained. This is all too reminiscent of 2007 and 2008. The stock was recently down about 20%, and this is one of the leading banks of Switzerland.
How many other European banks have the same problem? It would be naïve to assume there was just one.
It seems the only rational or motivation by investors to buy the market here is because they feel, or rather wish, that the Fed is about to pivot from its hawkish stance and turn dovish. There is no other reason to buy the market other than for this macro bias. At least that has been what investors have used over the past decade.
But the Fed has a much lower put strike than most expect, it cannot start printing at will unless something really snaps. All eyes on the Fed next week as to how they handle their angry tantrum-throwing toddler investors demanding even more candy. Their credibility is at stake and inflation an even bigger nemesis. Bear markets are very temperamental and can see nasty squeezes with the slightest change in wording, but the macroeconomic backdrop is far from improving.
