Today, it is widely expected the Federal Reserve will increase the overnight rate by 0.25%. The market is expecting the Fed will pivot sometime in early summer with the overnight rate being lower on December 31 than February 1.
January’s stellar performance is predicated upon such an outlook materializing. As measured by the VIX, complacency is very high and is around historical levels where reversals have occurred.
Will the FOMC shatter this expectation, causing downside volatility to increase? It is often written markets require a “Wall of Worry” to move higher but as measured by the VIX today there is hardly a curb.
There has been little discussion about quantitative tightening (QT). Will the Committee use the proposed shrinking of its balance sheet to further tighten?
Yesterday, the Treasury increased its estimated for federal borrowing for the current quarter to $932 billion from late October’s estimate of $579 billion. The is about $353 billion higher. The stated reason for such an increase was “ a lower cash balance at the start of this quarter, considerably bigger spending and marginally lower tax receipts.”
In other words, it is primarily about spending not revenue. As noted many times, 2021 the government collected 19.6% of GDP in revenue, its third highest percentage on record, exceeded only by 20% in 2000 and 20.6% in 1943.
At the close tomorrow, three of the largest companies in the world are expected to post results; AAPL, AMZN and GOOG. Layoffs have been largely centered in the technology sector as these firms extrapolated pandemic fueled demand into infinity.
Economics 101 has shattered the unfounded illusion that technology is impervious to the business cycle. Wall Street however has rewarded such job cuts by sending shares higher, believing the reductions will increase profitability and productivity.
A question at hand is the psychological damage caused by these layoffs. Silicon Valley culture is one where it is believed that layoffs cannot occur. Some have called it a “culture of snowflakes.”
Bloomberg wrote extensively about the “shock” that is now occurring to the workforce where most believed in a “culture of naiveite” which is now being replaced by “strain and skepticism.”
Will this “strain and skepticism” be reflected in the valuations of technology shares? A daunting question given the massive influence tech shares have upon the indices.
The Federal Reserve makes a statement at 2:00 and most believe it can potentially have a large impact on the markets.
Last night the foreign markets were up. London was up 0.16%, Paris up 0.07% and Frankfurt up 0.14%. China was up 0.90%, Japan up 0.07% and Hang Seng up 1.05%.
Futures are down about 0.50% as the markets are bracing for the outcome of the Fed meeting. Most markets have had a stellar start to the year on the belief the Fed will pivot later in early summer and the overnight rate will be lower on December 31 than February 1. Will these expectations be dashed? The 10-year is up 7/32 to yield 3.49%.