From the Desk of Ian Culley @IanCulley
No worry, beef curry!
The markets barely flinched after the Fed raised interest rates – again.
Honestly, I didn’t tune in to the press conference. I prefer to focus on the tape.
So you won’t get a rundown of Jerome Powell’s forward guidance, or lack thereof, from me.
I can only relay the information provided by the market.
Obviously, the rising-rate environment remains intact amid sustained inflationary pressures – “higher for longer.”
We can all agree on that.
The true value from Wednesday’s events resides beneath the headlines…
Investors are adjusting to a new rising-rate regime as they accept the unavoidable: inflation.
The US 10-year breakeven inflation rate is shaping up as a potential “not a top” formation:
I’ve noticed similar patterns across stocks and commodities, especially cyclical value-oriented market areas.
It makes sense. The Fed has yet to emerge as the victor.
And the 10-year breakeven continues to hold above its former prior-cycle high from 2018 – a critical inflection point for global risk assets.
The big difference from last year: Markets have turned the page, embracing aggressive Fed policy and rising rates.
Check out the Equities for Rising Rates ETF $EQRR:
EQRR is composed of about 30% energy, 25% financials, 19% materials, 16% industrials, plus some other stuff.
Energy, financials, materials, and industrials will deliver outsized returns as rates rise.
And, given the current conditions, it’s unsurprising that EQRR is on the verge of breaking out.
Rather than directly trading EQRR, I’ll drill down to individual names and industry groups with the goal of riding the strongest stocks to new highs.
That’s always my goal: to buy the strongest and sell the weakest.
It’s not only energy and metals, though.
Even lumber stocks are breaking out of bullish consolidations.
Not only do these breakouts reveal a healthy rotation – a key bull market characteristic.
These trends also offer exceptional risk-to-reward opportunities in the coming months, quarters, and years.
Countdown to FOMC
The market is pricing in a pause at the Nov. meeting after yesterday’s 25-basis point hike.
Here are the target rate probabilities based on fed funds futures:
Click the table to enlarge the view.
Thanks for reading. As always, be sure to download this week’s Bond Report!