Going into Wednesday’s Fed announcement on their new target Fed Funds rate, 75 basis points look like it’s in the bag. At the same time, the triple Qs, the ETF that tracks the performance of the NASDAQ 100, is at an interesting juncture.
Stock prices do not rise forever, even though it sometimes seems like they do. The Federal Reserve will announce its target Fed Funds rate, and the announcement will be followed up with the obligatory presser. The Fed will raise short-term rates by 75 basis points. The Fed Funds Futures market essentially confirms this.
The exhibit above shows investors believe there is an 87.5% chance of a 75 basis point rise and a 12.5% chance of a 50 basis point increase. So anything else would be a surprise. So we think the Fed will follow the market.
That said, investors are hoping for a slowdown in rate increases. The exhibit below shows the probabilities of rate increases for the December Meeting. It shows a 5.3% chance of a 25 basis point increase, a 44.4% chance of a 50 basis point increase, and a 50.3% chance of a 75 basis point increase.
To develop such an expectation, one must believe that next week’s CPI inflation report will show a slowdown in price increases. The consensus expectation is for a 0.4% increase in CPI for October. This would make the year-over-year number 8.2%. So if the government estimates prices went up more than 0.4% in October, the Fed would likely do 75 basis points. If it comes in less, there is a chance they slow down to 50 basis points.
We have often stated that they will have to raise rates substantially to slow down money supply growth. So long as the borrowing rate is below the inflation rate, there is an incentive to borrow and buy assets. However, we are sympathetic to the idea of slowing down, and monetary policy works with a lag. A change in monetary policy today may not affect GDP, inflation, employment, etc., for 12 to 18 months. We, however, suspect they will go too far, principally because they always do.
The NASDAQ 100 has been a big winner since the bottom of the financial crisis. From bottom to top, the QQQs are up 16-fold. Wow! That is about a 22% compound annual growth rate. The chart above shows the index is at a critical juncture. It is sitting right on the uptrend line. For 14 years, that has been an excellent place to buy, but there is something different about this pull pack. The QQQs are underperforming the S&P500 for the first time. This suggests an underlying weakness we have not seen for quite some time.
We’ll be catching the $270 level. If it breaks, we could see the next leg of the bear market get underway. We will have to rethink our bearish thesis if it bounces hard from current levels. The only way we see that at the moment is a significant drop in inflation, enough of a fall that gets the Fed to slow down rate increases and asset sales.
Now is an excellent time to say on your toes.
