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Jumbo Rate Hikes & Market Response

U.S. stocks closed higher on Friday, 9th September 2022, snapping a 3-week losing streak. 

Investors took the opportunity to start buying from Wednesday, when the market failed to go lower and looked oversold. Sellers got squeezed out of their positions and backed away. 

There was almost a sense of FOMO (fear of missing out) that pushed the stocks higher over the next 3 days.  

It looked like it started from the bond markets when yields started to reverse from the highs.  

The dollar also gave back some of its recent gains and the stock market took its cue from there. 

This was all happening while the BOE and ECB raised rates by 75 basis points. The swap market is now pricing a 75 basis point hike from the Fed. 

The Dow finished the holiday-shortened week up 2.8%, while the S&P 500 Index rose 3.6% and the Nasdaq shot up 4.2%.  

The 10-year U.S. Treasury added 12 basis points during the week to end with a yield of 3.31%. 

Here are the closing levels on Friday, 9th September 2022:

 Last Change %Change 
Dow Jones 32,151.71 +377.19. +1.19% 
S&P 500 4,067.36. +61.18. +1.53% 
Nasdaq Comp 12,112.31. +250.18. +2.11% 
US 10Y 3.31%   
VIX 22.79 -0.82 -3.47% 

It looks like the bulls just don’t get the picture. They are literally fighting the Fed. 

The belief is that higher interest rates will not stop the economy from growing stronger. 

Recession is far from their minds. 

While they may be right at some point, it may be too early to claim victory. 

With so many headwinds, a Fed that wants to drain liquidity, and central banks like BOE and ECB making jumbo rate hikes, they could be setting themselves up for disaster. 

The Fed is not going to be happy with the market response as this is working against their objective of cooling down the economy to bring inflation down. 

If the markets don’t go down, the Fed may force them to go down. 

Like I said before, the only way for the Fed to back away is for inflation to come down to the 2% target of the Fed.  

I don’t think we are close to there yet. 

While the technical picture is looking positive for stocks, and it is possible for it to go higher, it would be risky to go all in at this point.

Source: CBOE, Bloomberg

This commentary is written by James Gomes 
James has been in the finance industry for over 30 years and most recently worked for a large U.S. bank for more than 20 years. 

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