Rate-Hike Expectations Continue to Rise

Here's the new look for year-end.

Interest rates are on the rise. Or at least, that’s the expectation. To quickly recap the last four weeks, the January jobs report came in stunningly hot (more than double economists’ expectations). Then the CPI, PPI and PCE reports all came in hot. 

In other words, inflation is not dying down the way the Fed had hoped. 

At the start of the year, the assumption was that the Fed would do two 25 basis point hikes, pause, and then cut rates by year-end. 

That’s no longer the case. 

By June, the Fed Funds Futures market is pricing in 75 basis points worth of increases from today’s levels (to a range of 5% to 5.25%). A month ago, that expectation stood at just 3.7%. Now it’s the base case. 

By year-end, the market expects rates to be unchanged from the June levels. 

In other words, hike into the summer and then no rate cut. A month ago, expectations for this scenario stood at just 0.3%. Expectations also called for rates at year-end to be at the same level that they are today (at 4.5% to 4.75%). 

“Higher for longer” may not pan out. I think it will, because inflation is proving to be quite stubborn and the US consumer continues to spend rather freely. If it does pan out and the Fed is forced to go higher than the market previously thought and hold there for longer, then that’s a notable market headwind. 

Technical Edge — 

• NYSE Breadth: 54% Upside Volume 

• Advance/Decline: 59% Advance 

• VIX: ~$21

S&P 500 — ES 

We faded hard from yesterday’s resistance zone, although the ES held ~3975 on the pullback. That was constructive, although the fade was certainly a blow to the bulls’ morale. 

That’s especially after already having declined in 5 of the last 6 sessions. 

As for Tuesday, we have another Globex rally underway. Can this one stick? 

The Trade: Keep a very close eye on the 4025 to 4035 zone. Yesterday’s high of ~4025 comes into play in that range and just before the declining 10-ema. I wouldn’t hate a rally to the 10-ema and trade back below Monday’s 4024.75 high, giving us a decent short opportunity. 

The 4020 to 4030 zone has been resistance for a week now. If the ES can clear this zone and the 10-ema, 4055 to 4060 is in play. 

On the downside, 3970 to 3975 remains vital for the bulls. A break of this area puts last week’s low back in play. Below that and 3920 is next. 

SPY, Bonds & NVDA