Fed Rate Hike Sends Treasury Yields Higher and The Stock Market Lower

Stocks fell by 50 bps on the day following the Fed’s 25 bps rate hike and press conference. There wasn’t really much in the way of surprises, given that this rate hike and the ones that could potentially follow were laid out in the Jackson Hole speech, which Warsh referenced on a few occasions during today’s press conference. Maybe it was his way of saying he told you back in August.

Again, the key takeaway from today’s meeting was that the Fed removed a dose of policy accommodation, which, to me, means more still needs to be taken away. How much more will depend on how much the market works with the Fed and how much tightening of financial conditions it does on the Fed’s behalf.

Considering that HYG finished slightly higher today, I would say not much has been accomplished so far.

While everyone focuses on the 10-year, the 2-year rose by almost 6 bps to around 4.73%. I still think the 2-year is heading toward 5% over time. The Fed may have to hike another 3 or 4 times before this all said and done to push conditions to where they need to be.

Meanwhile, the Bank of Japan will have to hike rates this week; I don’t see how they can avoid it. I mean, they don’t have to, but 160 on USD/JPY seems like the next stop if they don’t hike, and I would imagine long-end JGB rates would rise considerably further as well.

Meanwhile, gold is probably screwed at this point. Higher rates and a stronger dollar are not going to be bullish for the yellow metal. For now, gold is holding support at $4,275, which is an important level to watch. I still think it heads back toward the $4,050 region. Maybe it goes lower, but it has to start somewhere.

Finally, the VIX 1-Day finished the day lower, even though it reached 18.5 in the minute before the press release and rose as high as 19.4 after the press conference. The only good news, I guess, is that implied volatility will probably fall at tomorrow’s open, which could help the S&P 500 recoup some of today’s losses.

Would I be surprised if the S&P 500 rallied tomorrow? No. I would actually be more surprised if the VIX 1-Day didn’t fall at the open tomorrow.

-Mike

Michael Kramer publishes independent macro and options research read across 10+ platforms and by institutional desks.

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Glossary by ChatGPT

Basis Point (bp) — One-hundredth of a percentage point, commonly used to describe changes in interest rates and bond yields.

Financial Conditions — The combined state of interest rates, credit spreads, asset prices, and other financial variables that influence borrowing, spending, and economic activity.

HYG — The ticker for the iShares iBoxx $ High Yield Corporate Bond ETF, commonly used as a proxy for conditions in the U.S. high-yield corporate credit market.

Implied Volatility — The market’s forward-looking estimate of the magnitude of potential price movements embedded in option prices.

JGB — Japanese Government Bond, debt issued by the government of Japan.

Long-End — The longer-maturity portion of the yield curve, typically referring to bonds with maturities of 10 years or more.

Policy Accommodation — Monetary policy settings intended to support economic activity through relatively low interest rates or other easing measures.

USD/JPY — The currency pair representing the number of Japanese yen required to purchase one U.S. dollar.

VIX 1-Day — The Cboe 1-Day Volatility Index, which measures expected S&P 500 volatility over approximately the next trading day.

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