Bond Market Carnage

Stocks are trying to fight the Fed and the bond market and its struggling.  The pain is real in the bond market these days.  This is probably the weakest bond market in the last 50 years.  SOFR/Eurodollars are pricing in 5% Fed funds for March 2023.  That's another 190 bps of hikes in less than 5 months.  There are some cracks forming in the bond market, as you are getting indiscriminate selling in the long end of the curve.  The Treasury auctions over the past several weeks have been quite weak, a sign that foreign buyers are not in a buying mood and US domestic demand is just not there as investors are still piling more money into stocks than bonds.  

There are so many things going haywire outside of equities (USDJPY hit 151!), yet US stocks remain remarkably well bid, refusing to make new lows as Treasury yields make new highs.  A few days ago, Jim Bullard, the loudmouth at the Fed, showed some signs that hawkishness has reached its peak, as he put conditions on the Fed rate hike path after December.  Its not much, but its a small sign that the Fed is starting to get a bit nervous about the economy, without wanting to give the financial markets any hints of a Fed pivot.  

The bond market is now taking the Fed's hawkish rhetoric and running with it, seeing how far they can take yields higher until either the stock market starts sinking to new lows or the Fed take their foot off the brake.  It appears that the stock market will have to sink to new lows before the Fed really changes its rhetoric.  There are still too many dip buyers holding up the markets, which just means the bond market will have to keep pushing rates higher until the stock market gets the message.  At these level of yields, further bond market weakness will flow directly to the stock market.  These are dangerous levels, running straight towards the edge of the cliff, without a parachute.  

As I am writing this, we just got a WSJ article from the Fed whisperer, Nick Timiraos, who is hinting that the Fed could slow down to 50 bps rate hike at the December meeting.  It doesn't sound like much, but the STIRs market was pricing in a 5% Fed funds rate, so a slowdown to 50 bps or less in December would be a sign that the Fed is aware that things are on the edge of breaking.  You had Yellen come out with a word about Treasury market liquidity last Friday, and now Timiraos getting word that the Fed wants to slow things down a bit in December.  

This little sign from the Fed will not reverse the damage that has been done to the economy by signaling a year end Fed Funds rate well above 4%.  But it could be enough to prevent a UK gilts type of scenario from happening in the US Treasury market.  A less hawkish Fed in November and December, which is probably the most likely scenario, will be a short term positive for stocks, and both a short and medium term positive for bonds.  It could spark a 3-4 week bear market rally, but not something that lasts into 2023.  You have a return of stock buybacks in the end of October, with most earnings out of the way.  November and December are historically heavy stock buyback months.  However, there just hasn't been enough of a reset in retail positioning in stocks, or the usual outflows that you see around bear market bottoms.  So there is still a long ways to go.  

Missed the SPX short waiting for a bit higher levels to put on a position, so just waiting on the sidelines for a higher probability trade.  The volatility is just immense in this market, something that the VIX is underestimating.  Regularly seeing 2-3% intraday moves.  The SPX is trading more like the Hang Seng index than a steady blue chip index.  The longer the SPX lingers under 3750, the more likely the top of the next countertrend rally will be under 3900.  Its the opposite of what you had to do for 13 years.  Instead of buying the dip, its short the rip.