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Final Fed Hike Will Be Stock Rally’s Last Gasp

Final Fed Hike Will Be Stock Rally’s Last Gasp

Authored by Simon White, Bloomberg macro strategist,

Looser financial conditions lie ahead…

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2 weeks ago

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Final Fed Hike Will Be Stock Rally's Last Gasp

Authored by Simon White, Bloomberg macro strategist,

Looser financial conditions lie ahead as the Federal Reserve’s last rate hike is likely already behind us, meaning rates will become less restrictive and excess liquidity will continue to rise. Stocks are primed for one last push higher before recession risk intervenes, triggering a correction.

After the most rapid tightening cycle in history, the Fed is most likely done, for now at least. The end of Fed rate-hiking cycles has historically marked peak tightness in financial conditions, generating a tailwind for stocks and other risk assets.

But that’s only if a hard landing is averted - which looks unlikely.

Thus any support for stocks from relatively looser conditions is fated to be short lived.

Wednesday’s Fed meeting will be the eleventh since the bank started raising rates in this cycle. June’s meeting was a pause, while July’s hike is likely to prove to be the last - at least until inflation becomes a problem again.

That means rates have likely hit their peak level of restrictiveness.

Using the Laubach-Williams estimate of r-star - the natural rate of interest - and comparing this to the real fed funds rate, we can see policy’s degree of restriction peaks at the Fed’s last hike.

The average move in real rates after the Fed is done is significant enough that - whether r-star has risen or fallen post the pandemic - rates are destined to become less restrictive. Even if the policy rate is held steady for some time, the totality of its impact will ease as incrementally more cuts are priced into the curve. (Forward guidance works when there is a hard floor close to where rates are desired to be, which is not the case when we are well above the zero bound).

On top of this, risk assets should continue to be supported by excess liquidity, the difference between real money growth and economic growth. As the black line in the chart below shows, excess liquidity has been rising, driving the risk-asset rally we have seen over the last six months or so. There’s more to come, if history is a guide, as the brown line shows that excess liquidity typically keeps rising after the Fed’s last hike, not peaking until about a year-and-a-half later.

So far so good for risk assets. And we have prologue to support us.

The S&P’s gradual rise toward the end of hiking cycles becomes a more rapid increase when it’s clear rates have peaked.

But a recession is the trunk-endowed beast in the room.

If we split up the hiking cycles that had a recession within a year of their end and those that did not, there is a clear divergence in the picture.

Recessions, and the lead up into them, overwhelm any positive effects from looser financial conditions, and coincide with a weakening in the stock market.

A soft or no landing has become the consensus, but recession risk remains very real. My Recession Gauge looks at a whole cross-section of economic and market-based indicators. When over 40% of them have triggered it has always preceded a near-term recession. The gauge, even though it is off its recent highs, remains above the recession threshold, intimating a downturn is close.

There is no space for complacency when it comes to recessions. They are regime shifts that happen slowly, then suddenly. Interactions between hard and soft data start to negatively reinforce one another, and past a certain point there is a cascading effect, resulting in a rapid deterioration in economic conditions. Economic data is typically revised much lower after the fact to belatedly reflect the sudden weakening.

Stocks and other risk assets, though, start to sell off well before the recession’s official NBER-defined start date, and long before the recession-dating body announces this. That’s why tracking leading indicators, such as the Recession Gauge, will be crucial in knowing when to de-risk.

From the Fed’s perspective, the risks from further hikes are becoming more balanced. Inflation has fallen to an average of a little over 3%, and by the time of the next-but-one meeting in November (assuming they hold at this week’s meeting), leading indicators show that jobs and growth data will have weakened further.

Also, the rapidity of rate hikes increases the chance their cumulative impact has yet to be fully felt. The Fed has raised rates by 525 bps in a little over a year, taking them to 5.5%, only 100 bps below the median peak of 6.5% they reach at the end of previous hiking cycles.

It’s even more dramatic when you consider rates were virtually at 0% when the Fed started raising them. In geometric terms, rates have risen faster than they ever have before. The Fed has enough justification to take its foot off the brake altogether.

We won’t know when the last Fed hike is ex ante. But there are enough reasons to lean heavily in the direction that it’s been and gone.

If so, past behavior is consistent with stocks continuing to rally as conditions loosen, until the gravity of recession takes them lower. Après la Fed, le déluge – just not immediately.

Tyler Durden Tue, 09/19/2023 - 10:50

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CME Group (CME) posts second-best ever September and Q3 volumes

There was strength across various asset classes, with interest-rate products among those growing at an impressive rate. The standout performer was Ultra…

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October 4, 2023

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There was strength across various asset classes, with interest-rate products among those growing at an impressive rate. The standout performer was Ultra US Treasury Bond Futures, which soared to 308,238 contracts. There was also robust volume growth for SOFR futures (+44%) and options (101%).

However, last year’s record-setting September meant a year-over-year decline for a range of assets, even as the month compared favourably with over-trading periods overall. The ADV for interest rate dipped 10% from a year ago to 10.2m, though it did climb 6% overall in Q3 to 11m. There was also a 24% drop off for the equity index ADV, which came in at 7.1m last month.

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Investors reacted fairly positively to the news on Tuesday. CME Group did trade lower during the morning session but recovered to close 0.75% higher at $201.66. Those gains looked more impressive considering Tuesday proved to be a challenging day for many stocks and shares. CME Group is now not far off its yearly high of $209.31, which was set back in early August.

The post CME Group (CME) posts second-best ever September and Q3 volumes appeared first on LeapRate.

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FTX-SBF charges valid despite lack of US crypto laws, DOJ says

Sam Bankman-Fried’s counsel had argued that FTX was not located in the United States, and as SBF did follow regulatory obligations concerning FTX US,…

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October 4, 2023

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Sam Bankman-Fried’s counsel had argued that FTX was not located in the United States, and as SBF did follow regulatory obligations concerning FTX US, charges related to FTX international shouldn’t apply.

The United States Department of Justice (DOJ) filed a motion in court on Oct. 4, claiming the lack of crypto regulations in the U.S. is no bar to the criminal charges made against former FTX CEO Sam Bankman-Fried (SBF).

The DOJ’s letter was filed in response to the defendant’s request for clarification and reconsideration of charges related to the misappropriation of funds in FTX. Lawyers for SBF argued that their client was “not guilty because FTX was not regulated in the United States, and he followed the rules concerning FTX US.”

The DOJ called this argument irrelevant, claiming that even though the existence of legislation may be necessary to prove a legal obligation, the lack of it does not affect whether the defendant’s victims committed money to him. The DOJ noted that the defendant’s claim about a lack of regulations related to customer funds usage is false as there are existing rules against it.

The DOJ further argued that the existing laws prohibit companies from stealing customer assets, and the defendant has been charged under the same. Furthermore, the defendant committed substantial misrepresentations to customers, as well as having stolen money from them.

Related: What has Sam Bankman-Fried been up to in jail?

The DOJ argued that it is irrelevant to whether the defendant made substantial misstatements or omissions in the supposed “absence of clearly applicable laws or regulations.“ It cannot be proven that the wire fraud allegations are “actus reus,” meaning guilty act, regardless of whether there is regulation or not.

SBF is currently facing multiple charges of wire fraud and misappropriation of customer funds, among others. The former FTX CEO is currently in jail for violating his bail conditions and trying to influence potential witnesses. However, he has appealed — to no avail — several times to be released on bail before the trial commences. SBF’s legal team cited a lack of internet connectivity hindering his defense preparations, as well as no vegan meal options.

SBF faced his first day of jury trial on Oct.3, with reports suggesting the trial could last as long as six weeks.

Magazine: Can you trust crypto exchanges after the collapse of FTX?

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Bank of Korea to start CBDC infrastructure pilot

The pilot will include private banks and public institutions, while the Bank for International Settlements (BIS) will support it with technical expertise.
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October 4, 2023

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The pilot will include private banks and public institutions, while the Bank for International Settlements (BIS) will support it with technical expertise.

South Korea joins a growing number of nations researching central bank digital currencies (CBDCs). The Bank of Korea (BOK) will launch the pilot project, exploring the technical infrastructure for a digital currency. 

The joint announcement of the CBDC pilot by the BOK, the Financial Services Commission (FSC), and the Financial Supervisory Service (FSS) was published on Oct.4. According to the document, the project will assess the viability of a future monetary system grounded on "wholesale CBDCs."

The pilot will include private banks and public institutions, while the Bank for International Settlements (BIS) will support it with technical expertise. The BOK is going to test both retail and wholesale types of CBDC. Within the experimental framework of the latter, the banks will tokenize their deposits and circulate them in the network, monitored by the BOK, FSC and FSS. The live testing of the retail CBDC should begin right after the system setup in Q4 2024.

Related: Crypto makes up 70% of South Korea’s reported overseas assets

As it usually goes with the CBDC tests, the BOK notes that the exploring doesn’t equal the inevitable implementation. However, the First Deputy Governor of the FSS, Lee Myung-soon, called the pilot a step to the future monetary system:

"The BOK has persistently pursued technological research related to CBDC. This test, building upon past achievements, represents a significant step towards creating a prototype for the future monetary system."

These words resonated with a statement made by one of the chief executives of France’s Central Bank on Sept. 3. In his speech, Denis Beau, the first deputy governor at Banque de France, called the CBDC “the catalyst for improving cross-border payments by enabling the build-up of a new international monetary system.” 

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