Fed Could Hike 50bps, Here’s Why

US stocks continue to gain on the back of, or the positive spin thereof, any piece of economic data released.

Yesterday saw a deluge of US data that was as questionable as it was reassuring?

While many headlines read the market was up on the GDP and other data, in actual fact the market fell considerably in the hours following the release of the data. It was later in the day, and partially on the back of a growing meme trade around Tesla, that saw a renewed steady buying wave.

This is something we have seen before in the US trading session. There appear to be extremely large global funds, perhaps sovereign funds, that have simply decided the worst of the US economic slow-down is already fully priced, and therefore the strong rally of recent months is set to continue. That any negative data, and most of it is, simply will not last and so they just buy away.

However, what no one seemed to want to talk about too much on the day was the mix of positive and negative implications, for both the economy and interest rates.

I believe the Fed will hike by 50 points at this next meeting and I will explain why. This would now be a considerable shock to the market, but so keen seems the buying, and positive spin determination, people would probably just say, “oh, well that means we are closer to the end of hikes”? 

There is a complete disconnect from the on the ground reality of the economy still sinking with no automatic turnaround valve.

There was a lot of data, but in a nutshell, the last quarter data for GDP showed a significant slowing from Q3, but was better than people feared.

Whereas, all of the more recent data except Durable Goods Orders and Initial Jobless Claims, painted a very worrisome state of affairs indeed. Significantly undermining the comments of many that yesterday’s data showed a ‘soft-landing’ was possible.

While Initial Jobless Claims, and Durable Goods jumping 5.6% were nice numbers, they really, along with the better-than-expected GDP number, ensure the Federal Reserve will still feel it has an inflation fight on its hands. One where the economic damage of their actions is actually less than they feared. 

Remember, the stated objective of the Federal Reserve is to soften demand and employment. From their point of view, they are likely to perceive more has to be done. Slowing again too soon, with inflation still at 6.5% and gasoline prices beginning to rise again, would seem a strategy fraught with danger.

The worst thing they could do, from their perspective, would be to begin a roller-coaster rate adjustment period. Better to overdo the rate hikes and ensure inflation is defeated, than to slow too sharply, only to have increased hikes yet again.

Hence the positive spin of the data on the day could yet prove inappropriate. Still, for the moment there are few like myself still calling a 50-point rate hike and this is the markets primary decision-making focus it would seem. 

It is possible the Fed will feel there is enough lag built in from previous hikes, so they can slow, but given the Fed’s stated approach to all this I am still forecasting at least another two 50-point rate hikes. Three to four should as it appears, gasoline prices again trend skyward.

This is a rally to sell, still, but the nature of the determined buying is a bit like confronting a runaway freight train with no driver. 

Can only suggest that at the first sign of trouble, due to the tremendous long positions now building, to be very aware that the reality bites moment could be very profound indeed.

Market insights and analysis from Clifford Bennett, Chief Economist at ACY Securities

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