Nick Timiraos at the WSJ is at it again, reporting on what the Fed will do at its next meeting in two weeks. They will hike by 75 bps according to him, taking the fed funds range to 3-3.25% and then will slow down the pace of increase in the following two meetings. On today’s front page he said, “The Federal Reserve appears to be on a path to raise interest rates by another .75 percentage point this month in the wake of Chairman Jerome Powell’s public pledge to reduce inflation even if it increases unemployment. Fed officials have done little to push back against market expectations of a 3rd consecutive .75 point rate rise in recent public statements and interviews ahead of their Sept 20-21 policy meeting.” We hear from Powell today at 9am but Timiraos told us all we need to know.
After raising by 75 bps in a few weeks, Powell will likely say what Philip Lowe, the Governor of the Reserve Bank of Australia, who just hiked by 50 bps on Tuesday, said today, “We recognize that, all else equal, the case for a slower pace of increase in interest rates becomes stronger as the level of the cash rate rises.” His rationale was similar to what Brainard said yesterday, “We are conscious that there are lags in the operation of monetary policy and that interest rates have increased very quickly.” Now, we’re not talking about ending the hikes from here, just reducing the pace as the end game level is still to be determined for both the RBA, the Fed and some others.
In response we’re seeing a sharp rally in Australian bonds and it’s carrying other sovereign bonds in the region higher. The 2 yr yield is fell by 15 bps to 2.91%, a 3 week low. The 10 yr yield is down by 14 bps to 3.57%, a 2 1/2 week low.
Aussie 2yr
With regards to the ECB and their 8:15am est rate announcement, the consensus is for a 75 bps hike and Lagarde really has no choice but to do so. In anticipation, the euro STOXX bank stock index is higher by .50%, still though down a shocking 77% from its 2007 high. There is huge value in European banks that have a lifeline now with positive interest rates but on the other hand they are loaded with the exact bonds that have sold off and they are dealing with a nasty energy led recession and all the bad debts that will be associated with it.
STOXX 600 Bank Stock Index
Positively in Europe, the price of Dutch TTF natural gas is down for a 3rd day, by 7.6% to just under 200 and that is the lowest in a month and thus giving back the Nordstream shutdown rally on Monday. Also, brent crude is just about back to where it was the day before the Russians invaded. On February 23rd it closed at $87.25 and as of this writing it sits at $88.23.
Dutch TTF Nat Gas
As no action has been taken yet, the Japanese are still relying on verbally trying to talk down the yen but to no avail. There was a get together today with members of the Finance Ministry, the BoJ and the Financial Services Agency and all we got was a comment from the Vice Finance Minister who said “The in the two days of Sept 6-7, the currency has fallen by around 5 yen to the dollar. Fundamentals alone can’t justify these moves…If these types of moves continue, the government stands ready to take necessary responses in the FX market, without ruling out any options.” To be a fly on the wall of that conversation. This seemingly tougher talk does have the yen off its lows overnight but only little changed on the day. Bond yields were flattish overnight as the BoJ stepped up its buying of 5-10 yr JGB maturities. It’s amazing that Kuroda still has his job.
The sentiment set up for yesterday’s stock market rally was very helpful. Not only was the market oversold but yesterday we a big drop in the number of Bulls in the Investors Intelligence survey (as of last Friday) to 29.7 from 38.4, the lowest since it hit 26.5 in June. Almost all of them went to the Correction side as the Bears fell only slightly to also 29.7 from 30.1 last week. Today, AAII said Bears fell by 3.8 pts to 18.1 and that is now .1 pts below the June 23rd print of 18.2 and is the smallest number since April. Bears rose another 2.8 pts to 53.3, the highest since late June when it reached 59.3. The CNN fear/greed is at 40 vs 45 one week ago. While it’s in the ‘fear’ category, it is not as extreme as the other figures. Outside of these sharp market rallies, it’s still a bear market with the S&P 500 trading at a still rich 17.5x. I don’t see how this multiple doesn’t compress to 15 or less inevitably.