The Dividend Cafe - The DC Today - Wednesday, December 14, 2022

Episode Date: December 14, 2022

Welcome to Fed day Wednesday on DC Today. Following positive sessions on both Monday and Tuesday leading up to today’s Fed announcement, we gave 142 points back on the Dow but remain up on the week in both stocks and bonds. I fully unpack today’s Fed announcement, the market reactions and implications and several takeaways in my Fed-heavy video podcast that you will not want to miss. Links mentioned in this episode: TheDCToday.com DividendCafe.com TheBahnsenGroup.com

Welcome to the DC Today, your daily market synopsis of the Dividend Cafe, brought to you every Monday through Thursday to bring you up-to-date information and perspective on financial markets. Well, hello, good evening, and welcome to this Fed Day Wednesday, DC Today. My name is Brian Seitel. Thank you for joining us in watching and listening. We have, or I have a pretty decent amount of Fed talk to go through. We had sort of a cooler than expected CPI number yesterday. And then what ended up being technically an inline Fed comment today that the market perceived as more hawkish because it was hoping for it to be dovish. But also to unpack that primarily today, it's a lot of Fed talk and I'll talk about stocks and bonds and kind of how it all correlates together. We were yesterday up over

700 at one point, as we discussed, and ended up closing just over 100 and some odd points on the day, kind of gave a lot of that back. It was volatile, and it was around this sort of inflation number that came out that was a little softer than expected. It was up 0.1% on the month to a 7.1% year over year. So it's a little cooler, which was good. But you had sort of this big market reaction on the upside right away, and then you had it all come back and go negative. And then you sort of closed right at the end slightly or a little positive, which was fine. Today it was almost similar. You had the same type of reaction, another big macro event. I would

say it's the last macro event for 2022, at least in the US. We've kind of, we're now into holiday season here and should quiet down a little bit, at least on the economic side. But yesterday was CPI, which is inflation. Today we had our Federal Reserve come out with their policy statement and raise rates by 50 basis points. And I'll get into that. Futures last night were pretty quiet. I mean, we were up 100 points or so on the night, and then we kind of opened around flat. The market itself this morning.

Pre-announcement, pre-Fed announcement was trading pretty positively. We were up probably 280 points or so mid-morning Eastern. And so we had a nice little up day. And a lot of that was just sort of the same thing. It's people or institutions or basically short-term driven financial actors kind of getting ahead of some big news, try to predict it and try to get it right. And when you have a policy decision that's set by people, which can say anything and change one way or the other, it's pretty hard to predict. So you kind of had markets run up 280 points. Then you had Fed announcement, which was 2 p.m. Eastern. And then you had this initial big sell-off in markets. We went from up 280 to something like down 400. Same reaction as yesterday. Big initial reaction on the front end. Then you get the sell-off or the other reaction. And then you get normalcy, kind of

cooler heads prevailing as the data is actually understood and realized. And so to that end, let's go through the data. The Fed took rates up 50 basis points. This was all but completely priced into the market. That wasn't new. What wasn't priced in was that they were going to literally not change any of the other part of their statement. So I think there was two words changed that were not meaningful. So other than raising rates, everything's the same, including the language that was ongoing rates may be necessary to cool inflation or may be appropriate. The market was hoping that verbiage would come out. Now that we've got a couple of months of software inflation data, maybe they would say, okay, this is it.

Merry Christmas, and we'll talk to you next year. But that's not what they're saying. They're sticking to the same tune. That said, we can look at what the bond market did, and I can tell you what the market is thinking about it. And then we can also look at what they did for guidance, which I think is telling. They continued their quantitative tightening. It's $95 billion a month to try to reduce their balance sheet. That's the path that they've been on. But what they did for forward guidance is take down GDP expectations. Actually, I take it back. They took up GDP expectation for 2022. So they basically said instead of 0.2% for this year, wow, we estimated it'll be 0.5%. So not recession. They think that we'll get positive GDP in 2022. For 2023, they basically lowered GDP forecast from 1.2% to 0.5%. So basically,

they're saying 2022 and 2023 from an economic GDP perspective are going to be exactly the same. In the same token, they moved unemployment rate from 4.4 to 4.6 next year. So let's think about that. So they took GDP for this year up, they took GDP for next year down, and they took unemployment for next year up. So if you think about it, it's kind of their soft landing is what they're estimating, which is what I wouldn't be surprised if that did happen. I'd be surprised if it was exactly those precise numbers, but it doesn't fully shock me that the Fed would say we're going to get it right. You know, I don't know what else they would really say in a statement. I don't think they would guide that they're going to get it wrong or something like that. The bond market, same

initial reaction as stocks. You basically had the bond market, the two-year yield dramatically rose. In fact, I have a chart of it in the body of DC today. You had sort of a big sell-off in yields, a big rally in bonds yesterday. So prices went up in two-year, yields went down dramatically yesterday, and then you had some normalization before the end. And then today it was sort of the exact opposite. You had a more hawkish tone from the Fed or perceived that way. And so you had yields rates basically shoot up initially dramatically and then end up selling back down essentially unchanged on the day. So what does that all mean?

The Fed is painting a soft landing. That's one. the Fed is painting a soft landing. That's one. Two, the interest rate paradigm, the yield curve has shifted lower since yesterday and today. So what that says is basically all things being equal, inflation is cooling because the inflation expectations, which is what yields are, what interest rates are represent, are still lower today after a more hawkish Federal Reserve, deemed hawkish at least. You had expectations for Fed funds coming in a little bit higher. So for 2023, yesterday, it was assumed that we'd hit about a terminal Fed funds rate of something like 4.9% by June. This year, or as of today, sorry, we're now looking at something

like 5.1, 5.2. So yeah, a little higher, but not off to the races. I think the Fed is signaling that what they're doing is working, that they're getting inflation coming back. And we have made this argument that the reason inflation is coming down is part because the Fed is making an effort to bring it down. It's raising rates. It's draining liquidity from the market. All those things do tend to slow growth. And I get that. But it's also just that supply chains are now easing. And so there's more normalcy. There isn't a bottleneck as much as there once was. And so inflation is coming down. And so the terminal rate going from something like 4.9 to 5.0, for me, it's a bit of a non-event. My takeaway from today's meeting was that everything we thought was going to happen, happened.

But we were a little disappointed they didn't bring more of the punch bowl back. I don't know. I mean, that's the best as I can describe it. So I view today as just in line. I think the market selling off 400 and then rallying back to close down about 140 is actually a positive sign. We're still up on the week and we're still up a fair amount from where we were at the lows when inflation was not kind of turning a corner.

And some other top news. I can point to outside of what the Fed did today, which is really the main news for the day. I can point to outside of what the Fed did today, which is really the main news for the day. We still have this sort of ongoing bankruptcy proceeding and indictment of FTX's CEO and founder ongoing through Congress. And that these hearings are basically going to find out and discover whether there was fraud involved and all those things. And, you know, it isn't something that we had a part in at all as far as any sort of opinion necessarily or any sort of certainly any exposure. Obviously, I don't want to see anyone lose money. But at the end of the day, frankly, I don't know if I really love overregulation either.

But aside from that, I think some regulation is probably needed, at least in financial markets. So that's probably where this thing is going to go, at least in the cryptocurrency space. And I can answer questions if anybody has a need to reach out to me directly on that. Just as you would expect, I guess this would be some public policy. Rates have gone up. So the debt service for this country has gone up too. We've spent about $100 billion over the past two months on interest expense, which is up about 80% from a year ago. So there's that. All these things are kind of correlated and tied together. What that speaks to is more deficits here in the coming years as rates kind of stay high. All that said, we have about 10% of tax revenues going to debt expense. Hard to say exactly, but I suspect that 10% may go to 15

or even 20 before we're kind of on the other end of this rate cycle. Well, one thing that we did see, although I don't know that there's a lot of change in this market, but with rates coming down, technically mortgage rates are down here over the course of about two months, not quite 1%, but pretty close, at least on a 30-year mortgage. So we closed today at about 628 on a 30-year mortgage thereabout. And there were some reports out that maybe that kind of helps the housing market from the pretty dismal or deflationary month-over-month numbers. I don't know that if you have mortgage rates three percentage points higher than a 20-year treasury or a 30-year treasury, that it's really going to spur more buying or transactions. I think you're going to need mortgage rates to be kind of sub 4% until you kind of get maybe the reinvigoration of that

market, which is deflating, which frankly, it probably should. It was pretty expensive, pretty overvalued. On deck tomorrow, we have some economic data that's coming out. Both the Bank of England and the ECB will have their policy updates. So the same thing that our Fed did today, they'll come out with their policy tomorrow. There's some China activity that we can kind of read through as they either reopen or don't reopen and have COVID policy, zero COVID or don't. And then we have some retail sales and jobs numbers in the US. So tomorrow is a pretty hefty lineup. I know David will be back on DC today with you tomorrow to kind of go through all that. And then we'll of course have

Dividend Cafe in your inboxes on Friday. So that's what I've got for you today is a quick update. Please reach out with any questions. I always love to hear from you. Send me an email, give me a call. If I don't speak to you for some reason me an email, give me a call. If I don't speak to you for some reason, Merry Christmas, Happy Holidays, and we'll be back with you soon on DC Today. Thank you. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, with Hightower Advisors LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities LLC. Advisory Thank you. The Bonson Group and Hightower shall not in any way be liable for claims and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice.

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