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The good news is that the stock is a little lower than it was Wednesday morning.
The bad news? Well, the major US indexes fell sharply yesterday, with the S&P 500 down almost 3% and the Nasdaq Composite Index down 3.6%. The real carnage happened at Alphaville’s popular stores like Carvana, GameStop, Tesla, and MicroStrategy.
The latter two fell 8.3% and 9.5% respectively, and the (very stupid) leveraged ETFs based on them fell 15-20%. Given the magnitude of yesterday’s reversal and the potential for ETFs to blow up and destroy the underlying stocks, this feels like a near-miss.
He blames the Federal Reserve’s “hawkish policies” for the turmoil.
Even though officials cut interest rates, the median forecast for core inflation (a key factor) shows they expect inflation to remain above target next year. The median forecast also calls for a smaller rate cut, and Fed Chairman Jerome Powell said officials “may become more cautious as they consider further adjustments to policy rates.”
Yes, Fed policy is likely to be tighter next year. And CME data shows that the market considers it reliable. Futures markets are currently pricing in the federal funds rate at about 4% at the end of next year. That’s 1-2 cuts. Yesterday, the consensus seemed to have settled on more than two.
All of this apparently came as a surprise to investors and market watchers, including Standard Chartered’s Steve Englander.
We and the market were very surprised by the hawkish tone of the FOMC’s change in economic forecasts. . . This was clearly a risk-off event. . .
Fed Chairman Jerome Powell largely explained the change as a rise in core inflation over the past two months, but noted that part of his forecast incorporates the expected impact of the incoming Trump administration’s policies. Most notably, it increased the core PCE inflation rate from 2.2% to 2.5% in 2025. Only three participants saw core inflation below 2.4%, so no amount of rounding could bring the 2025 forecast to the target.
At TS Lombard, another Steve (Steven Blitz) was taking a victory lap.
Markets are holding their noses because the Fed didn’t do what they thought they would do, but they did exactly what we expected all along – from September to the end of the year. and lowered the fund rate to the Taylor rule of 4.25% until significant change occurred. In the economy, interest rates will continue to remain high. I wrote this in July of last year, and also in September. Once inflation fell below the funds rate and employment began to soften, the FOMC returned to model-based policymaking, recognizing that inflation was the ultimate tracker. Guidance on inflation and employment is a smokescreen.
Barclays argues that the Fed chair did not seem particularly concerned about broader economic strength at his press conference.
Powell did not focus on cases of deteriorating economic or labor market conditions, suggesting that FOMC members are less concerned about downside risks than they were in September.
Anyway, after this statement, stocks went wild, the market went into turmoil, and Bitcoin fell about 6 percent on the day.
And yet. . . BTC futures rose slightly after that. So who knows? Thursday could be a good year-end test of low liquidity for our favorite discretionary trading rule, “Always fade out the Fed.” Or at least the market will move for the time being on the day the policy statement is announced.
