Stocks Primed for Unusual Rally on Fed Rate Hike — SkimNews
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- Markets are pricing a 90% likelihood the Federal Reserve raises the federal funds rate to 3.75%-4.00% following Wednesday's decision, per the CME FedWatch Tool, with fed funds futures also showing spiked odds for additional October and December hikes.
- The 10-year Treasury yield hit 5% on Monday for the first time since 2023, a development that hurt equities as major averages fell across the board.
- Fed Chair Kevin Warsh delivered a tough anti-inflation speech at Jackson Hole last month, followed by hot inflation reports and a spike in oil prices that drove rate hike expectations sharply higher.
- Bank of America Securities rates strategist Mark Cabana expects a hawkish Warsh press conference to push 2-year Treasury yields up 5-10 basis points while 30-year yields fall a similar amount, warning that skipping the hike risks a "sharp and disorderly" long-end move.
- S&P 500 historically drops an average 3.4% in the month following initial rate hikes of past tightening cycles over the last 30-plus years, according to Canaccord Genuity analyst Michael Graham.
- JPMorgan's Mislav Matejka argues much of the recent repricing reflects rebuilding of a previously compressed term premium rather than a signal that inflation is about to spiral, suggesting marginal upside pressure on yields should diminish.
- Horizon CIO Scott Ladner said the signaling impact on the long end of the yield curve is the "unusual setup" driving potential equity upside even as the Fed raises rates.
Why it matters: Warsh's tone at Wednesday's press conference will determine whether 2-year and 30-year Treasury yields diverge sharply — hawkish signaling pushes 2-year yields up 5-10 bps while 30-year yields fall, easing equity pressure. If the Fed skips the hike, Cabana warns of a "sharp and disorderly" long-end Treasury move that could destabilize markets.
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