Equities & Bonds Face 'Critical Juncture' with Fed's Rate Decision & Guidance

SPEAKER_1 (0:00)

Welcome back to Morning Traded Live. It's time now for the big picture. So let's welcome in the team from Charles Schwab. Nate Peterson, Director of Derivatives Analysis, and Cooper Howard, Director of Fixed Income Research and Strategy. Gentlemen, thank you so much for your time. Gosh, where do I start?

Which end of the spectrum? Let's kick things off with you just because of the data that we got this morning. I mean, you know, I was talking to KG. I wonder if resilient consumption and hotter inflation, by the way, of import prices does some of the monetary policy hawks some favors this afternoon. What's your thoughts?

Cooper Howard (0:30)

You know, great for having you on this morning, Sam. I agree a lot going on in the markets today. Obviously, the biggest thing that we're focused on today is what the Fed is going to do. And I don't necessarily think it's what the Fed is going to do because like you'd mentioned earlier, it's largely baked in that it's going to be a 25 basis point hike. What we're closely watching though is that what the Fed is projecting going forward. I think that's going to be more of the narrative and more of the impact, especially on longer term rates going forward. So we do again expect that the Fed is going to hike by 25 basis points today.

There is a potential risk, however, I want to say that it's a small risk or a small probability that they do hold. And right now, the market's pricing in about a 90% probability of a rate hike. I do think giving a small weight towards a hold is relatively appropriate. And I think that if you do hold today, which again is in our base case, then you would actually maybe see longer term yields rise pretty substantially.

There would be a question over Fed credibility, especially given that inflation hasn't been moving lower to the 2% target. However, if we do see the Fed hike today by 25 bips, as we do expect, you could see rates actually move a little bit flatter on the yield curve. So short-term rates higher, longer-term rates relatively unchanged, maybe a little bit higher though.

SPEAKER_1 (1:50)

Yeah. And I mean, looking at the CME Fed watch tool right now, I mean, on the screen, I mean, look at the probabilities of the next three meetings. I mean, it's fascinating as much as what the market is now currently pricing in here until the end of the year. I mean, all the political stuff aside, throwing those midterms in the mix, obviously in November as well. So it's going to be very interesting to see what they have to say in the market reaction. Nate, on that point, then, is this a hike that's been pretty much baked in this afternoon, positive for stocks?

Nathan Peterson (2:22)

Well, the potential to get some relief because there's a lot of build-up, heading into this, getting the first, potentially, the first rate hike in a number of years. So you could get a relief rally, I think, like Cooper is suggesting, the commentary forward guidance, that's going to be important. Then of course, what do the bond yields do? How do they react? Are we going to get some bond volatility following the commentary that we get from Warsh? He's been basically hawkish, tight-lipped, but hasn't moved yet. So I think there was some criticism of him being tight-lipped. I would suspect he'd be a little bit more willing to provide some forward guidance, or at least answer some more of those questions, maybe loosen up those lips a little bit in the press conference following up. So we'll see.

And we're just kind of at a critical juncture, technically here on S&P is at 7600 That's been a key level here multiple times over the past couple of months. The Russell is kind of at a three-month low deterioration there. NASDAQ Composite right there at the 50-day SMA. So it just feels like there's some tension building up into this. Let's kind of, I think you might want to have to wait and see what those bond yields do, because Sam, in my mind, and Cooper can speak to this too, but that 5% level on the 10-year, I feel like is really key because that is the high from 2023

But if it doesn't really push through that 5%, then I feel like the psychology could be, hey, that's where buyers are stepping in, and therefore the odds of the next 10, 20, 30 basis points could be lower rather than higher. But I think we're at a critical juncture today, obviously, with the Fed. We'll see what happens.