The 2s10s Rising, Fed Rate Hike Bomb Looms, 20pc Downside Risk This Month

The market is starting to price in Fed rate cuts. My sense here is the Fed will crash markets and end the rate hike cycle in 4 weeks with a 75 bps hike.

Here is teh 3-month yield and the S&P 500 inverted. Higher rates are causing exponentially worse outcomes for stocks. In the week before the June Fed meeting, the market was at the low-end of a 50 bps hike. Then the Fed hiked by 75 bps and the S&P 500 Index fell 10 percent, with most of the loss coming in three days of relentless selling. Today, the market is not pricing in any rate hike. What do you think will happen if IRX explodes higher from 1.6 percent towards 2.50 percent?

The 1-month treasury yield is at 1.29 percent today. Perhaps rate hikes will start being priced in now. If so, there could be 20 percent downside risk for the market from here, or about 600 points on the S&P 500 give or take. Since Powell says he learned "how little he understands about inflation" the past year, I'm not at all confident he realizes the asymmetric policy outcomes from here.

If the Fed hikes 75 bps, I think they could be cutting or at least announcing the end of rate hikes in August, and maybe announce a cut in September. Everything will crater, including oil. If the Fed hikes 25 bps, the market probably rallies and the Fed is still in a rate hike cycle come September. If they hike 75 bps the inflation fight is over and higher inflation is a risk because of the Fed's "drunk driving" on rates. If they raise more slowly, the inflation fight can continue for a few months. When they finally pivot, they can do it slowly with pauses instead of rate cuts.