Fed hike is probably the less-bad option

00:00:00: Kevin Walsh stopped playing the forward guidance game.

00:00:02: He wanted the markets to guide the Fed toward its decision, so this Wednesday morning the market's verdict is quite clear The Fed should deliver a twenty-five basis point rate hike today.

00:00:14: What happens next?

00:00:15: So welcome to Swiss Coats Daily Market Talk.

00:00:19: It's Wednesday, the sixteenth of September.

00:00:21: I'm Ipeco Skardishkreia.

00:00:23: The Fed will likely announce a twenty-five phases point rate hike in a few hours from now so we'll talk about that.

00:00:29: The impact on brother markets Whether they yield today are high or okay by historical means and much more.

00:00:36: But before we do And as always Please keep in mind that opinions aren't my own and this is not financial advice.

00:00:50: So the day has come, ladies and gentlemen.

00:00:53: The Fed under its new chair Kevin Warsh will more likely than not announce a twenty-five basis point rate hike later today.

00:01:00: If that's the case it would be first rate hike in three years And first rate from the new Fed Chair.

00:01:06: Kevin Wash decision we all know is perpendicularly against what current US administration and Donald Trump would like to see.

00:01:15: But note that the Fed did not guide market toward that decision.

00:01:19: Investors guided themselves towards this decision in light of the latest economic data, especially inflation and geopolitical factors that amplify inflation data.

00:01:30: And a twenty-five base point hike today is what investors collectively think should happen – their position for it!

00:01:36: The Fed funds futures actually priced at more than ninety percent chance.

00:01:44: So it's not Kevin Walsh, It is us all together.

00:01:47: And well, it would be really odd and potentially dramatic for the markets if the Fed decided to go against that expectation.

00:01:55: We will indeed see a very sharp sell-off in U.S.

00:01:58: dollar and also longer term U. S. Treasuries!

00:02:01: That's quite terrible when you think that the US ten year old just passed five percent mark this week and is hovering just below level this morning.

00:02:10: but those are levels which have not been seen since two thousand seven.

00:02:15: On the other hand, if the Fed hikes a raise today with no further guidance about what it would do next which I think will happen while stock and bond markets could see as less bad scenario or option.

00:02:29: And eventually react positively to that decision The yield curve in this case could flatten and equities may react positively.

00:02:37: Now here I would like to come back the US ten year yield, reaching and breaching five percent psychological mark for a minute because many people don't understand how bad this really is.

00:02:50: Many people react saying you are too young my lady!

00:02:52: Five percent.

00:02:53: historically not at high level at all.

00:02:56: but with all due respect it's not apples-apples comparison.

00:03:00: ladies & gentlemen.

00:03:01: yields were at these levels or higher twenty years ago.

00:03:05: This was denom twenty years ago.

00:03:08: At that time, the developed market government debt was also significantly lower.

00:03:13: mind you!

00:03:14: The U.S.

00:03:14: total public debt for example is less than ten trillion US dollars.

00:03:19: today it has passed forty trillion US Dollars and rising the roughly servicing that debt paying interest on that debt.

00:03:27: as a different beast then twenty years The so-called developed market economies today have become much more vulnerable to rising rates than they were twenty plus years ago.

00:03:37: So no, I will insist that given the actual context of debt growing faster than GDP.

00:03:43: Five percent for US ten-year yield is quite a high yield because in numbers pre two thousand seven The U S debt to GDP ratio was near sixty percent at its maximum.

00:03:54: It stands past one hundred and twenty per cent today.

00:03:57: so again Yes five percent on us ten year paper.

00:04:01: it's quite a higher yield for America.

00:04:03: who must issue debt to pay interest.

00:04:05: today at a time foreign investors and institutional money is leaving the US Treasuries.

00:04:11: And, The US Treasury Department's efforts to counter the selling in treasuries doesn't echo more than a fly-in crowded trading room!

00:04:19: So...the real question here isn't where the yields stand today compared with pre-KRWs.

00:04:24: It rather how high they will go?

00:04:27: How agile central bank policies will be to keep inflation expectations in longer term yields anchored and how long equity markets would withstand yield near these levels?

00:04:37: Those are the real questions that you should ask yourself.

00:04:40: Now, the good news is that right now and as we also saw it through S&P five hundred companies very strong second quarter earnings.

00:04:47: And earning growth rates for US economy remains quite robust.

00:04:51: That's obviously thanks to massive AI investment but also government spending.

00:04:56: consumer spending also proved quite resilient to tariff energy shocks and leather somehow master weakening consumer confidence and growing pain that we see in their housing market due to rising mortgage raise GDP growth near two percent annually, the US can withstand rate hike today.

00:05:14: But the bad news is that while the energy shock is now playing a nasty role, The correlation between oil and U.S.

00:05:21: treasure yields are very tight today near its highs levels in seven years according to an article from CNBC showing that the ball market is reacting unusually strongly towards every move in oil prices.

00:05:35: So if oil prices stay high or they continue to push higher markets will be pricing not simply higher rates but higher inflation risk for longer.

00:05:46: Combined with heavy treasury issuance, fiscal concerns and competing hyperscaler bonds apply where long-end yields could keep rising even without additional Fed hikes from here and equities may feel the heat even with no rate hike!

00:06:00: And today especially with no rates that would explode the longer term inflation expectations.

00:06:06: now hopefully oil prices will not stay high far along.

00:06:09: we'll likely see them pull back rapidly if Middle East Ukraine wars.

00:06:13: and but as long as oil producers cannot bring their barrels to the international markets, they can not sell them.

00:06:20: The undesired pressure on yields will persist and remain a looming risk for

00:06:25: equitables.".

00:06:25: Now if you look at the numbers because this is what we love to do add forward P ratio of roughly nineteen of S&P five hundred earnings yield is about five point two percent today.

00:06:36: that's roughly what she gets buying US ten year paper in holding it to maturity.

00:06:41: Of course, stocks can potentially pass inflation through into revenues and earnings whereas the nominal coupon on a conventional treasury is fixed.

00:06:49: But to hire US yields move less.

00:06:51: investors are being compensated for taking additional risk of owning equities.

00:06:57: It wasn't big problem because since Iran was started well the sharp rise that we saw in U.S.

00:07:02: yields didn't necessarily prevent S&P five hundred from climbing higher but the higher deals.

00:07:09: So the question is, how high should US yields go before derailing the U.S.

00:07:14: equity rally?

00:07:15: Well it depends for whom really!

00:07:17: For hyperscalers for example The gap between return on invested capital and average cost of capital remains wide enough to absorb a further rise in financing costs.

00:07:26: Alphabet's latest Return On Invested Capital stands above forty percent compared with a Cost Of Capital of around ten per cent.

00:07:34: Microsoft Meta and Amazon also retain comfortable cushions.

00:07:39: Oracle, on the other hand is already much closer to the line but it's still positive today!

00:07:44: But looking beyond the hyperscalars though The picture is much less comfortable.

00:07:48: mind you Highly leveraged capital intensive And low return companies would obviously feel the pinch from higher wheels Much sooner than the big and hyperscalar piece.

00:07:58: We see that the Russell two thousand Is actually suffering today.

00:08:02: So what's funny is that the companies have helped pushing US yield higher through debt issuance to finance enormous AI investment may actually be among the company's best equipped still-to-survive those higher yields, even though they are more vulnerable today.

00:08:16: To the rising yields than they were before ones that generate revenue Today.

00:08:20: That how low leverage and available free cash?

00:08:23: so The companies I call boring also in a better position to navigate through potentially turbulent waters Even though their upside potentials nothing compared to the exciting and futuristic companies.

00:08:34: As paradoxical as it may sound, a rate hike in firm stance today are not as scary as letting monetary policy diverge from economic fundamentals.

00:08:44: On the contrary higher interest rates today is probably one of few things that could help cooling pressure on longer end yield curve by anchoring long term inflation expectations.

00:08:58: This is why a rate hike today could be less horrible to equities than no action.

00:09:03: So let's see what the Fed decides and how markets react!

00:09:07: So this is all for today.

00:09:09: I'm Ipek Oskar Deshkaya and thank you for joining me, And Thank You For All Your Beautiful And Supportive Comments!

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00:09:45: So I will meet again tomorrow and until then good day trading.

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