FED DAY: Is a Market Reversal Coming?

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Michael Zuber (0:31)

Alrighty, folks. It is Fed Day. We need to talk about it. It's not only and frankly probably more important than just the rate decision. Is what the vote is, what the dot plot is. What does Kevin Warsh say in front of the microphone? Because at the end of the day, a single quarter point one and done rate hike basically does nothing. So we are going to walk through all the potential scenarios, or at least all the scenarios that I could think of. And then we're going to lay it out. What does it mean for the 10 year note? What does it mean for the dollar? What does it mean for stocks? What does it mean for real estate? So we will start with the rate decision. Because really, it really boils down to two decisions today. I do wish I could fathom a third choice, but here we go. So we're going to go into the Fed meeting, or at least the Fed decision, with let's just call it a 10 year at 5%. Let's use a round number. I think right now it's at like 4.98. But let's just call it 5% between friends.

If the Fed does nothing, and basically gives lip service to inflation, I believe the 10 year note will race higher. Okay, what does race higher mean? I suspect if the 10 year note is 5%, that by the end of the week, it will be at least 5.15. So a significant move higher if the Fed does nothing. Now, why is this? It's really quite simple. Kevin Warsh, like it or not, has painted himself into a corner where the bond vigilantes are basically saying, okay, tough guy, you gave us a nice speech at Jackson Hole, now do something. Show that you are serious about inflation. Show that you are sick of 58 months of being above 2%.

Basically, show me or shut up. So again, if he decides to hold and give lip service, watch out, buckle up. Tenure going higher, mortgage rates going higher, and they could go much, much higher. Okay, next, there's a 25-point rate increase. Again, I think the odds last I saw are roughly 90%.

The market is priced, again, I want to say that again, the market is priced, aka positioned, for a quarter-point rate hike. So anything other than that will be a surprise and or a shock.

But the simple act of a 25-point rate increase is not the magic. It's not the sauce that we want. What do we want? We want to know the Fed is serious. So besides delivering a quarter-point rate increase, the dot plot, sometimes called the SOP, needs to show more rate cuts or more rate hikes coming. Now, again, I'm not here saying they will happen. I'm just saying we need the story that the Fed is serious.

We would likely need to see at least one more rate hike this year, and likely two, possibly three, by summer of next year. We would also need Chairman Warsh in front of the microphone to sound hawkish like he did at Jackson Hole.

If he does that, the 10-year note, again, we're assuming it's trading at 5% for easy math, could actually fall. Mortgage rates could actually fall. Folks, the long end could actually fall if we get a quarter point, and he is aggressive, hawkish, pterodactyl, whatever you want to call it. Okay, what's the other option? Well, he could give us that quarter point rate hike, and then he could say things like, we're going to let that marinate awhile, we're going to let the data do this or that, we'll come back next year after our little sitting groups have their say, yada, yada, yada, basically delay, delay, delay. Again, in that example, here's your quarter point. Again, you're expecting it. I don't want to surprise you, but I'm a dove.

That is not good. Now, I don't think the 10-year note shoots as high as no decision, but the 10-year note could certainly go to 5.05, which I do think we saw just in the last couple of days. But again, it's all about, it's not only the decision, it's the decision, the dot plot, and the talk track in front of the microphone. Now, just because it's my channel, my microphone, I do wish that Kevin Warsh and team would shock the market and deliver a 50