How Stocks and Bonds Might React to Today’s Rate Increase… So Goodbye Yellow Brick Road!
When are you gonna come down?
When are you going to land?
I should have stayed on the farm
I should have listened to my old man
You know you can’t hold me forever
I didn’t sign up with you
I’m not a present for your friends to open
This boy’s too young to be singing
The blues, ah, ah
So goodbye yellow brick road
Where the dogs of society howl
You can’t plant me in your penthouse
I’m going back to my plough
Back to the howling old owl in the woods
Hunting the horny back toad
Oh, I’ve finally decided my future lies
Beyond the yellow brick road
Ah, ah
– Elton John, “Goodbye Yellow Brick Road”
My baseline expectation is that the Federal Reserve will increase rates by a quarter basis point this afternoon.
I expect relatively hawkish comments from Chairman Kevin Warsh – as he reiterates his job of getting inflation down:
* Equities could initially respond positively to what is perceived to be responsible monetary policy in the face of sticky inflation. I don’t expect the rally to be sustained and I plan to short Indices on a ramp higher.
* Bonds might also respond well… with yields could decline by 5-10 basis points.
There are multiple reasons why I expect an equity rally to be short lived – which I have covered fully recently in my most recent “Market Outlook” column.
But market participants could soon realize that even a multiple rate rise will not dampen inflation (and that there are likely adverse consequences, especially as seen in the housing market). Rather, the problems of inflation are supply chain, fiscal policy and geopolitical based — not interest rate based.
And the anticipated tightening policy (of perhaps two more hikes by January, 2027) will cause more damage than good.
As noted on Tuesday, I believe we have already seen a top in the S&P and Nasdaq Indices for the year.
Summary
Goodbye Yellow Brick Road and say Goodbye to Rosy Scenario. Kass: Welcome to the ‘Rosy Scenario.’ What Could Possibly Go Wrong?
Positions: None.
