Equities & Bonds Face 'Critical Juncture' with Fed's Rate Decision & Guidance

0:00Welcome back to Morning Trade Live. It's time now for the big picture. So let's welcome in the team from Charles and Schwab. Nick Peterson, Director of Derivatives Analysis and Cooper Howard Director of Fixed Income Research and Strategy. Gentlemen, thank you so much for your time, gosh, where do I start? Which ended the spectrum? Let's kick things off with you just because of the data that we got this morning. I mean, you know, I was talking to KG, I wonder if resilient consumption and hotter inflation, by the way, of import prices does some of the monetary policy hawks and favours this afternoon? What's your thought? You know, the great for having you on this morning, Sam. I agree a lot going on in the markets today. Obviously, the biggest thing that we're focused on today is what the Fed is going to do. And I don't necessarily think it's what the Fed is going to do because like you'd mentioned earlier, it's largely baked in that it's going to be a 25 basis point hike. What we're closely watching, though, is that what the Fed is projecting going forward. I think that's going to be more of the narrative and more of the impact, especially on longer term rates going forward. So we do, again, expect that the Fed is going to hike by 25 basis

1:01points today. There is a potential risk, however, I want to say that it's a small risk or a small probability that they do hold. And right now, the market's pricing in about a 90% probability of a rate hike. I think giving a small weight towards a hold is relatively appropriate. And I think that if you do hold today, which again is in our base case, then you would actually maybe see longer term yields rise pretty substantially. There would be a question over Fed credibility, especially given that inflation hasn't been moving lower to the 2% target. However, if we do see the Fed hike today by 25 bips as we do expect, you could see rates actually move a little bit flatter on the yield curve. So short term rates higher, longer term rates relatively unchanged, maybe a little bit higher, though. Yeah. And I mean, looking at the CME Fed watch tool right now, I mean, on the screen, I mean, look at the probabilities of the next three meetings. I mean, it's fascinating as much as what the market is now currently pricing in here until the end of the year. I mean,

2:02all the political stuff aside throwing those midterms in the mix, obviously in November as well. So it's going to be very interesting to see what they have to say in the market reaction Nate on that point, then, is this a hike that's been pretty much baked in this afternoon, positive for stocks? Well, the potential to get some relief because there's a lot of, you know, build up, you know, heading into this, you know, getting the first potentially, the first rate hike, you know, in a number of years. So you could get a relief rally. I think like Cooper is kind of suggesting, you know, the commentary forward guidance, that's going to be important. And then of course, what do the bond yields do? How do they react? We're going to get some bond, y'all, one volatility following, you know, the commentary that we get from more, she's been basically hawkish, tight lift, but hasn't moved yet. So I think there was some criticism of him being tight-lipped. I would suspect to be a little bit more willing to provide some forward guidance or at least answer some more of those questions, maybe loosen up those lips a

3:04little bit in the press conference following up. So we'll see. And we're just kind of at critical juncture technically here on, you know, S&P is at 7,600. That's been a key level here in multiple times over the past couple of months. The Russell's kind of at a three-month low deterioration there, NASDAQ composite right there at the 50-day SMA. So it just feels like there's some ancient building up into this. Let's kind of, I think you might want to have to wait and see what those bond yields do because Sam and my mind and Cooper can speak to this too, but that 5% level on the tin year, I feel like is really key because that is the hike from 2023. But if that if it doesn't really push through that 5%, then I feel like the psychology could be, hey, that's where buyers are stepping in and therefore the odds of the next, you know, 10, 20, 30 basis points could be lower rather than higher, but I think we're going to wear the critical juncture today, obviously, with the Fed. We'll see what happens. Yeah, absolutely. And you know, I was listening

4:09to the chief economist over at BNY investments earlier this morning, who's now said that they're expecting one and mum from Mr. Warsh, there's afternoon. I mean, what does the market do with that information, Cooper? I mean, you know, as far as as you say, not what they're likely to do, but what they're likely to say or not say, because we can see in the market pricing and the current positioning that they're kind of been pushed into a corner here, as you mentioned, particularly with respect to the credibility side of it. But what sort of language should we be looking out for in the commentary? And how do you think the market is likely to react if we don't get any indication of forward guidance? Yeah, I think that's a very good point. I think that is a very good point of what Neat brought up of kind of that psychological level of a 5% yield. Because if you look at the underlying drivers of why 10-year treasure yields are higher, we like to bring them down into their three major components, inflation expectations, the term premium, and then Fed funds expectations.

5:11And focusing in on that Fed funds expectations, that's really been the biggest driver of the move up in 10-year yield saw recently. Like you mentioned, Sam, the market's starting to price in more than just one rate hike this year, potentially moving. So I do think looking at that forward guidance, and we know Warsh has been very tight-lipped about forward guidance, but looking at that forward guidance, if we do get any indication that it might be a one and done or a two and done if we will, that might actually put a cap on where yields can move up from here. So it might cap potentially how much higher yields can go. Okay, and you know, I was just running through with John Kosa, Nate, the Asprey 6 model. You know, we were looking at that 7600 level, which the S&P 500 is, managing to hold on to for now. You talk about how technically there has been some deterioration. What levels are you watching? You know, how much damage have we seen under the surface with that violent churn? Well, in small caps, it had been the worst. You know, they were the best to

6:17you go back a couple months, and they were the best performing, but you know, technically speaking here, three months low in the Russell 2,900 on the Russell 2,000. That was the key level where below that. And God, Sam, so the 7600 here, I'm surprised that oil is done what it's done over the past six weeks that yields have done what they've done over the past six weeks that we've gotten some questions around not in my backyard and AI infrastructure bill done. Not even to mention the AI fears about, you know, there being some rogue agents that, you know, take over humanity. And yet, there still appears to be somewhat of a bin under the market. Obviously, that's driven by, you know, EPS growth expectations, but that's tied right into the whole trajectory of the AI infrastructure build out. And I feel like the tail risk on that whole narrative has gotten bigger here. And especially going into the midterms, we're likely to see more commentary, you know,

7:17from the politicians about where they stand on data centers. So I got to say, technically, yes, we're right there. 7600 will be good to hold. If we don't do that, you know, we're roughly going down to 7300. That would be another key level there. But I feel like the market is giving the whole global economy, this AI infrastructure build out, the benefit of the doubt for right now. And we're right at 7600 right now, but we'll see where we close today. Yeah, and it's interesting because for now, the markets have largely been able to shrug off higher rates and higher yields because the earnings have been revised higher. So if any talk of the AI slowdown starts to creep into capex and what we're hearing from these companies, I mean, that could potentially pose a risk to earnings estimates. We haven't seen that yet. I guess we'll have to just wait. But guys really appreciate it. Great preview as we look ahead to the FOMC decision later this on, this afternoon, Nate Peterson and Cooper Howard from the Schwab Center for Natural Research.