Calling Cap On The FOMC

In this issue of the Peel:

• Yesterday, JPow and the rest of the FOMC maintained the target range of the federal funds rate at 5.25% - 5.50%
• Klaviyo and Pinterest had a ripe day, whereas Instacart and Opendoor had a down day following unraveling events
• Many investors are already calling cap on the FOMC's potential signal that they expect rates to be higher by the end of the year

Market Snapshot

Happy Thursday, apes.

Once again, we had the delightful fortune of playing audience to JPow’s dazzling show of big words and Fedspeak. Always a pleasure, even if not for markets.

And it sure wasn’t. Equities acted like a dog for the day, like when you grab their leash to go on a walk, then put it back down, then pick it back up just to mess with them.

Volatility was all over the place as all the indices traded lower into the FOMC meeting and dumped off immediately after. Megacap names led the way down, with the leading loser, Nasdaq, falling 1.53%.

Treasury yields bounced around as well but ultimately settled relatively unchanged. The 10-year yield rose 3bps by the end of the day’s session while the 2-year did slightly well, still kicking it above 5.0%. Meanwhile, the Dollar shot up, with index values rising past 105.50

Let’s get into it.

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Macro Monkey Says

JPow Speaks

Well, for once, we were right! I guess even a blind squirrel really does get a nut once in a while.

Yesterday, JPow and the rest of the FOMC maintained the target range of the federal funds rate at 5.25% - 5.50%. In other words, they held rates steady.

This time, however, the actual movement of base rates was the absolute least of the market’s concerns. We had already priced in ~99% odds of rates remaining in that range, and any deviation would’ve been a violation of the 8th Amendment to some.

Each quarter, the Federal Reserve releases the latest SEP, or Summary of Economic Projections, which is exactly what it sounds like.

"... when compared to June’s dot plot, just about all of them are becoming more hawkish."

As usual, there is one aspect of the report that carries more weight than others. The “dot plot,” which summarizes the individual projections of FOMC members for the path of interest rates at the end of each indicated period and into the long run, was the star of the show. It looks a lot like this:

Source

Now that’s a true beauty, huh? Apparently, not to the market. Each dot represents one member’s projection, and when compared to June’s dot plot, just about all of them are becoming more hawkish.

Expectations for end-of-year 2023 interest rates moved to 5.6%, up from the 5.1% previously priced in. Roughly translated, that means that not a single participant thinks they’ll cut rates this year, saving that honor for 2024. Speaking of 2024, end-of-year rate projections also moved up 0.5%, again indicating increased hawkishness and, more importantly, a distinct lack of dovishness.

As much as the actual level of rates matters, the direction of rates and overall expectations matter just as much. Despite rates not increasing, the future of rates is only looking yet again “higher for longer.”

Plus, this was our first glimpse into 2026, where JPow and the gang expect to see rates trimmed to 2.9%. Long term, however, the Fed’s “neutral rate” followed in the footsteps of the current rate and was held steady at 2.5%.

"In addition to bumping up rate expectations, the FOMC also raised projections for economic growth."

In addition to bumping up rate expectations, the FOMC also raised projections for economic growth.

Recall that interest rates are, in fact, pro-cyclical, meaning they increase when an economy is strong and decrease when it needs some relief. So, it’s only natural to see these two move hand in hand, but it’s gotta make you wonder what the participants expect in 2024 and ‘25 to dump rates so much.

Eh, probably nothing to worry about, right? We’ve got more than enough to deal with as is, but that’s a bridge I can’t wait to cross!

What's Ripe

Klaviyo (KVYO) ↑ 9.20% ↑

• Is anybody else starting to notice a pattern here? If not, you definitely will by the time we get to What’s Rotten.
• Klaviyo, a B2B marketing automation firm, went public on Wednesday in a bold IPO side by side with JPow himself. Shares listed at $30/sh (coincidence?) and closed at $32.76. Naturally, however, it followed a similar path as fellow recent attention-grabbing IPOs like Arm and Instacart.
• The $9bn fully diluted company actually opened around $36.75, meaning shares actually fell intraday. Luckily, the falling started right as average Joe’s like you and I were allowed to buy.
• But one thing is clear: the investment banks taking these things public are doing a damn good job. With shares opening above the listing price, this gave insiders their chance to dump at a profit and for you to, well, maybe just wait a few days to find out.

Pinterest (PINS) ↑ 3.13% ↑

• Safe to say Pinterest knows how to get people excited.
• Anyway, this time, Pinterest’s efforts were focused on investors (for once). The recently profitable company received a solid upgrade from DA Davidson following a hype-inducing investor day.
• The social media firm announced that monthly active user numbers had started moving higher again, along with an uptick in ad engagement. CEO Bill Ready also called for mid-teens level growth in revenue. That’ll do the trick.

What's Rotten

Instacart (CART) ↓ 10.68% ↓

• Is this like a fundamental law of nature or something? Instacart, like Arm and other recent IPOs, crashed well over 10.5% just a day following their public market debut.
• As we said about Arm, this playbook is fairly typical. Price discovery can take its sweet time, leading to much higher volatility in the early days. Unfortunately for Instacart, the volatility just happened to move in the wrong direction on Wednesday.
• Surely, JPow and the FOMC’s hating-on-markets vibe didn’t help. But shares remain above the listing price of $30 (coincidence?), meaning that the people who matter—those on the inside—are pleased. You and I can f*ck off, apparently.

Opendoor (OPEN) ↓ 7.21% ↓

• And while we’re on the subject of insiders, let’s take a look over at Opendoor. Turns out that insiders are, in fact, the only ones that matter to markets.
• On Wednesday morning, news dropped that CEO Carrie Wheeler had sold nearly ~$2mn worth of Opendoor stock. Needless to say, selling shares of your own company is generally not something the market likes to see.
• In the last 90 days, Wheeler is far from the only insider selling as well, meaning the usual idea that insiders sell shares for a variety of reasons that may not be directly related to performance carries less water.

Thought Banana

Weak Poker Face

Psh, it hasn’t even been a day yet, and it’s already time to call cap. Nice try, JPow.

As discussed above, the FOMC held interest rates at their current level at yesterday’s meeting. At the same time, they jacked up rate projections and reminded us once again why we can’t have nice things.

While Powell and the FOMC might signal that they expect rates to be higher by the end of the year and longer than they had before, that doesn’t mean it’s actually going to happen. To many investors already, they think it probably won’t.

Here’s a simple thought process potentially at play among members: “Well, I don’t think rates will or should be this high at the end of the year, but everyone else seems more hawkish, so I’ll project that they will be.”

"... the FOMC held interest rates at their current level at yesterday’s meeting."

And, while basing an investment thesis on the presumed thoughts of others is about as good as basing it off the latest movements of bigfoot, for most people, there are many reasons to think rates might have to come down sooner than expected.

Let’s not scare ourselves here, but JPow named those reasons today in response to one particular question, listing:

• Possible government shutdown
• The UAW, SAG, and writers strike
• Student loan repayment renewals
• Higher energy costs
• High borrowing rates

That’s got to get you excited, right?

"... the surprise for markets could be to the upside."

Powell dropped that happy-go-lucky list when responding to a reporter’s question on whether the soft landing was now the baseline expectation. JPow responded that:

"No, I would not do that… I’ve always thought that the soft landing was a plausible outcome.” Plausible, not probable—gotta hand it to you on that one, JPow.

So, if investors en masse don’t believe JPow’s absolute cap, the surprise for markets could be to the upside. After all, who doesn’t love a good surprise?

The big question: Will the Federal Reserve actually hold rates higher for longer? Can they? How will this affect everything from my paycheck to my portfolio?

Banana Brain Teaser

Yesterday —

There are 14 teams in the National Rugby League. During Round 6, every team plays another team, so there are seven matches. What is the probability of Glenn tipping every match right, assuming an equal chance of winning, losing, and drawing?

Answer: 0.0457%. There is a 1 in 3 chance of predicting each match. With seven matches, the probability becomes 1/(3^7) or 1/2187 or 0.0457%.

Today —

Always old, sometimes new. Never sad, sometimes blue. Never empty, sometimes full. Never pushing, always pulling. What am I?

Shoot us your guesses at [email protected].

Wise Investor Says

“Behind every stock is a company. Find out what it’s doing.” — Peter Lynch

How would you rate today’s Peel?

All the bananas

Decent

Rotten AF

Happy Investing,

Patrick & The Daily Peel Team