Daily Brief - First rate hike by June! (Nov 23, 2021)

The rate hikes are coming. Soon! The decision not to appoint Lael Brainard to Fed Chair triggered a sharp rise in bond yields yesterday, and buying in bank stocks.

The market is now pricing-in a full rate-hike by June (and almost three by December 2022). To highlight how far more hawkish than the Fed the market has gotten: that's before the July end of taper as laid out in the Fed timeline. The yield curve continued to flatten and the difference between 5-year and 30-year yields is now the lowest since March 2020.

After a chaotic open, Biden's Powell pick sparked a relief rally in stocks initially but rising yields soon forced Big Tech (and the broader market) to tumble. Markets seemed set to recover after Europe closed but a big MOC Sell order resulted in violent selling again.

Ok, so where does this leave me, you ask?

Most of the reaction today was more or less as expected. As we wrote in yesterday’s Daily Brief, Brainard was seen as anti-banks and pro-bitcoin. With Powell back in, banks went bid and crypto got clobbered.

Curve flattening, too, was expected. It’s the bond market’s way of politely acknowledging that the Fed isn’t about to lose control of inflation. However, the clock is ticking for Jay Powell to get the Central bank’s mandate right.

All of this is good news. Putting a more dovish Central Bank chief at the wheel of an already overheating economy and bubbling markets would have been - at best - a temporary boost. Sooner or later, bond markets would have punished the newcomer with a yield tantrum and a steepening yield curve that could choke off further stock rallies. Equity markets don’t like rate hikes but they dislike uncertainty of outcomes even more.

Better the devil you know than the devil you don’t.