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"Snowflake" Trading Continues, and It's Still Summer
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Friday, September 16, 2022
Look, no one thinks this has been a good week for the economy at large, the stock market more specifically. We’re looking at another leg down in today’s pre-market, with the Dow -382 points, the S&P 500 -52 and the Nasdaq -161 points.
We’re also at “quadruple witching” today, which sees the expiration of four different trading derivatives: stock index futures, stock index options, stock options and single-stock futures. These sorts of days are usually definitive on the trading environment, and clearly we’ve seen better times.
Aside from a stubbornly high Consumer Price Index (CPI) print for August this week, which killed the bull rally (amid a longer-term bear market), FedEx (FDX - Free Report) yesterday hacked $2+ off its quarterly earnings estimate, which is due out next week. These sorts of things bring the “snowflake” (defined in Webster’s #3B as “someone who is overly sensitive”) trader to the brink of panic that a recession is imminent and the Fed is not going to recognize this.
To all this, I’ll say something that may be of comfort to investors (who are not looking to withdraw their 401ks at this very moment): we’ve not seen a story leaked to the Wall Street Journal that the Fed is looking to raise interest rates by a full percentage point next week. The Fed is currently in a “blackout period,” meaning there cannot be any formal disclosure of a change of consideration a week ahead of the pending Federal Open Market Committee (FOMC) meeting. And this means that you can print the 75 basis-point (bps) hike.
What this does is brings our Fed funds rate to 3.00-3.25%, which while high considering we were at 0.00-0.25% the first days of March, is not only not meeting inflation metrics where they are today, but are not even necessarily high from an historical perspective. Of course, we know the “wall of worry” looks past this, toward a draconian existence where 4%+ interest rates bring the domestic economy to its knees while Fed Chair Powell cackles maniacally, but this does not need to be the case.
Here’s the deal: book 3% now. There are two more FOMC meetings before the end of 2022: November 2nd and December 14th. Whether they raise another 75 bps each of those meetings — which would bring Fed funds to 4.50-4.75% — is still in question, but judging by economic prints we’ve seen over the past few months, inflation is already being curbed. So the likelihood that the Fed tightens rates by a smaller amount that 75 bps at these final two meetings is better than pretty good.
And that should pave a way toward a brighter future in the markets. Of course we don’t know plenty — whether the Ukraine war will continue indefinitely or whether a defeated Putin will take a drastic measure to harm the European economy, whether the Fed will have overshot and drove the economy into a deep recession, China will keep shutting down on Covid-zero initiatives, etc. — but he Fed is not likely to speculate on any of that. If the more stubborn aspects of inflation (looking at you, CPI report) do not abate, the Fed will have little recourse than to raise rates at current levels.
But if any of these things — any of them (and we’re due for a break at some point, wouldn’t you agree?) — pan out better than expected, we can expect the currently hawkish Fed to relax its talons in order to see how the economy behaves without another tightening of the screws. And if this comes sooner that later, so much the better. So let’s all keep our eyes open going forward. Questions or comments about this article and/or its author? Click here>>
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"Snowflake" Trading Continues, and It's Still Summer
Friday, September 16, 2022
Look, no one thinks this has been a good week for the economy at large, the stock market more specifically. We’re looking at another leg down in today’s pre-market, with the Dow -382 points, the S&P 500 -52 and the Nasdaq -161 points.
We’re also at “quadruple witching” today, which sees the expiration of four different trading derivatives: stock index futures, stock index options, stock options and single-stock futures. These sorts of days are usually definitive on the trading environment, and clearly we’ve seen better times.
Aside from a stubbornly high Consumer Price Index (CPI) print for August this week, which killed the bull rally (amid a longer-term bear market), FedEx (FDX - Free Report) yesterday hacked $2+ off its quarterly earnings estimate, which is due out next week. These sorts of things bring the “snowflake” (defined in Webster’s #3B as “someone who is overly sensitive”) trader to the brink of panic that a recession is imminent and the Fed is not going to recognize this.
To all this, I’ll say something that may be of comfort to investors (who are not looking to withdraw their 401ks at this very moment): we’ve not seen a story leaked to the Wall Street Journal that the Fed is looking to raise interest rates by a full percentage point next week. The Fed is currently in a “blackout period,” meaning there cannot be any formal disclosure of a change of consideration a week ahead of the pending Federal Open Market Committee (FOMC) meeting. And this means that you can print the 75 basis-point (bps) hike.
What this does is brings our Fed funds rate to 3.00-3.25%, which while high considering we were at 0.00-0.25% the first days of March, is not only not meeting inflation metrics where they are today, but are not even necessarily high from an historical perspective. Of course, we know the “wall of worry” looks past this, toward a draconian existence where 4%+ interest rates bring the domestic economy to its knees while Fed Chair Powell cackles maniacally, but this does not need to be the case.
Here’s the deal: book 3% now. There are two more FOMC meetings before the end of 2022: November 2nd and December 14th. Whether they raise another 75 bps each of those meetings — which would bring Fed funds to 4.50-4.75% — is still in question, but judging by economic prints we’ve seen over the past few months, inflation is already being curbed. So the likelihood that the Fed tightens rates by a smaller amount that 75 bps at these final two meetings is better than pretty good.
And that should pave a way toward a brighter future in the markets. Of course we don’t know plenty — whether the Ukraine war will continue indefinitely or whether a defeated Putin will take a drastic measure to harm the European economy, whether the Fed will have overshot and drove the economy into a deep recession, China will keep shutting down on Covid-zero initiatives, etc. — but he Fed is not likely to speculate on any of that. If the more stubborn aspects of inflation (looking at you, CPI report) do not abate, the Fed will have little recourse than to raise rates at current levels.
But if any of these things — any of them (and we’re due for a break at some point, wouldn’t you agree?) — pan out better than expected, we can expect the currently hawkish Fed to relax its talons in order to see how the economy behaves without another tightening of the screws. And if this comes sooner that later, so much the better. So let’s all keep our eyes open going forward.
Questions or comments about this article and/or its author? Click here>>