The FED Pivot is bad for Bonds & Stocks

Regardless of what Wall Street analysts and their echo chambers may claim, the main point of the September 18, 2024, FOMC meeting is not the partisan and politically driven decision to cut rates but the fact that the FOMC has decided to abandon its 2% inflation target at least until the end of 2025.

As the 2% inflation target has shifted from being a ceiling (as it was between 2009 and 2020) and an average (as it was between 1994 and 2008) to now being a floor, the FED's Summary of Economic Projections suggests that the PCE is expected to be around 2.5% in the foreseeable future. Given that the CPI is typically 40+ basis points above the PCE, the FED is effectively aiming for a minimum inflation level of 2.4% or higher. Based on simple math, if the FED meets this new target, the average inflation rate for the next 12 months will likely be around 2.9% at best as the base effect reverse.

Since all financial assets are still priced based on a 2% CPI, the bond market is on the verge of a massive repricing due to the FED's new inflation target assumptions.

The second dire implication for the bond market is that, with massive tax and fiscal stimulus expected regardless of who occupies the White House, the 3.4% FED Funds Rate projected for the end of 2025 appears phantasmagorical and unrealistically low. Meaning that the FED will not be able to cut rates as it becomes increasingly impotent and irrelevant under Kamunism or Trumponomics 2.0.

?In layman's terms, this means Wall Street is likely to be disappointed by the pace at which interest rates declines if it declines at all after the political masks are down.

For equity markets, this means that the high for the year was reached on the same day the FED pivot occurred. From here, equities will likely first retest the August Yen Carry Trade Tantrum low before most likely breaking below that level, as uncertainties and social unrest spread before and after the key date of November 5th, the ‘D-Day’ of the year of political hell.

For bonds, the FED's confirmed actions and statements add to a 'supply-driven' bearish outlook for US Treasuries in a world where USD assets have been weaponized. In this context, the US 10-year yield hit a floor on the same day as the infamous FED pivot, with 3.5% now being the new floor and resistance expected between 5.0% and 6.0%, likely to be reached once the political circus around the White House is settled.

So, for the last three months of the year, investors should focus on bargain hunting in quality cyclicals, primarily within the Energy sector, and continue to accumulate physical gold, which remains the only antifragile asset capable of protecting against a potential replay of the Global Financial Crisis and the escalating war cycle. This approach will likely highlight the regret of the FED chairman's partisan and politically driven pivot, making the road ahead particularly chaotic to navigate.

https://themacrobutler.substack.com/p/50-bps-to-start-a-politically-bumpy