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As expected, the Fed cut rates by 25 basis points, but the market was caught off guard by the Fed’s positioning regarding future rate cuts. Looking back, it was somewhat obvious. Earlier today, I shared a video for Market Chronicles paid members, highlighting how analysts were expecting more rate cuts than what the Fed Funds Futures and overnight swaps markets were pricing in. Historically, in my experience, the FOMC aligns more closely with Fed Funds and swaps markets than with analysts’ expectations, so the analysts seemed overly optimistic.
We may see fewer—or potentially no—rate cuts next year. The Fed swaps market is currently pricing in just one rate cut for next year, with the odds of more than two cuts essentially at zero. Currently, the market projects the Fed Funds rate to end 2025 around 4%, which implies just one more small rate cut. This marks a significant shift from where expectations stood three to six months ago—or even last year.
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The two-year Treasury yield, currently hovering around resistance at 4.35%, could rise significantly. A breakout above 4.35% might push it towards 4.61%.
Meanwhile, the 10-year yield, now trading at 4.52%, is breaking out and could reach 4.75% or higher. Ultimately, if Fed Funds settle in the upper 3% range and you add a premium of 2–3% above Fed Funds, the 10-year yield could approach 6%. Similarly, the two-year yield in the high 4% range suggests another 200 basis points higher for the 10-year, reinforcing the potential for it to reach 6%.
The dollar strengthened sharply today, hitting 108, its highest level since November 2022. This puts the Bank of Japan in a bind ahead of its policy decision tonight. The yen, which is weakening against the dollar, has risen to 155. I doubt the BOJ wants further yen depreciation, so it may be forced to either raise rates or adopt a hawkish tone on future rate hikes.
This scenario continues to reflect the higher rates, stronger dollar, and tighter financial conditions we’ve discussed before. Credit spreads also widened significantly today. The CDX High Yield Credit Spread Index rose 17 points to 315—still low by historical standards but much higher than the sub-400 levels of a year ago. A widening in credit spreads typically translates to higher earnings yields on the S&P 500, which could lead to multiple contractions.
The S&P 500 dropped 3% today, closing below 5,900. If the index breaks this level, it could decline into the 5,600s.
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The VIX also spiked, ending the day at 27.6—up 12 points. The one-day VIX rose 32 points to 45.75, signaling sharply higher implied volatility. Realized volatility is also climbing, with the 10-day measure rising to 17.5, the 20-day to 13.5, and the 30-day to 12.
Small caps had a rough day, falling 4.5% and erasing all their post-election gains. The Russell 2000 is now back to November 2023 levels. Regional banks dropped about 5%, and the housing sector also saw significant declines, with the Philly Housing Sector Index (HGX) down almost 4%.
Finally, the three-month forward rate (18 months out) rose to 4.40% today, above the three-month Treasury spot rate for the first time in a long while, This marks the end of a prolonged period of inversion since the fall of 2022. The curve’s uninversion may further signal that the Fed’s rate-cutting cycle has concluded, as it closed above 0% at 0.06% today.
Have a great night, and I’ll see you next time.
-Mike
Charts used with the permission of Bloomberg Finance L.P. This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
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Charts used with the permission of Bloomberg Finance L.P. This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
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