Stocks Could Rally on Fed Rate Hike as Long-End Yields Steer — SkimNews
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- Federal Reserve is expected to raise rates 25 bps from 3.75% to 4.00% at Wednesday's meeting, with markets pricing a 90% probability per the CME FedWatch Tool, following Chair Kevin Warsh's hawkish Jackson Hole speech, hot inflation reports, and a spike in oil prices.
- Fed funds futures show the probability of two additional quarter-point increases in October and December has also spiked alongside the September expectation.
- The 10-year Treasury yield hit 5% on Monday for the first time since 2023, a move that hurt equities and pushed traders to prioritize the bond market's long end over equity borrowing costs.
- Horizon's Scott Ladner said the unusual setup is the net signaling impact on the long end of the curve — investors hope a Fed hike will tame pricing pressures and anchor long-term yields, which could end up being positive for equities.
- Bank of America's Mark Cabana laid out two scenarios based on Warsh's press conference tone: a hawkish message would push 2-year yields up 5-10 bps while 30-year rates fall 5-10 bps; a dovish message would see 2-year yields drop 5 bps and 30-year rates rise 5 bps.
- Canaccord Genuity's Michael Graham found that across six tightening cycles over the past 30-plus years, the S&P 500 dropped an average 3.4% in the month following the initial rate hike, though longer-term results improve.
- JPMorgan's Mislav Matejka argued much of the recent yield repricing reflects a rebuilding of compressed term premium rather than spiraling inflation, suggesting the marginal upside pressure on yields should diminish and clear room for equity gains through year-end.
Why it matters: The setup flips the usual rate-hike playbook: investors are watching whether Warsh's tone can stabilize the 10-year yield, which broke 5% Monday. BofA's Cabana expects a hawkish press conference to push 2-year yields up 5-10 bps while 30-year rates fall 5-10 bps, easing equity pressure; a dovish surprise risks disorderly long-end bond moves.
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