Fed Hikes Again as Yields Hit 5%

Grant Calloway

Well, er, the morning after the, the Fed's first rate hike in three whole years, and, uh, let me tell you, this tape is tighter than a drum. Chairman Kevin Warsh and the Federal Open Market Committee, they went unanimous, twelve to zero, lifting that benchmark rate by twenty five basis points, right into that target range of three point seven five to four percent. And, and then Warsh stepped up to the microphone for his press conference and didn't pull a single punch.

Grant Calloway

He looked right into the camera and said, and I quote, The plain fact is that inflation is too high, and has been for too long. End quote. And, boy, did Wall Street react to that hawkish tone.

Grant Calloway

The Dow Jones Industrial Average plummeted six hundred thirty one point two one points, or one point two one percent, landing at fifty one thousand four hundred sixty one point nine zero. The S and P five hundred dropped zero point four five percent to close at seven thousand five hundred fifty one point eight one, while the Nasdaq managed to hold virtually flat, down just zero point zero one percent.

Grant Calloway

But, uh, if you really want to see where the real tremor happened, you have to look over at the bond pit and energy. The benchmark ten year Treasury yield broke cleanly above five percent, touching five point zero zero four percent at its high. That is a level we haven't seen since 2007, before the financial crisis. Meanwhile, benchmark Brent crude is holding stubbornly above one hundred dollars per barrel.

Grant Calloway

And when you combine five percent bond yields with one hundred dollar oil, you get a classic high yield, high energy squeeze across the board. Look at the premarket movers today. Financials were getting hammered, led lower by Goldman Sachs, Bank of America, and Wells Fargo on fears that higher borrowing costs will choke off lending growth and deal making.

Grant Calloway

Industrials like Caterpillar are sliding because corporate capital expenditure gets real expensive when debt yields five percent. On the flip side, Chevron is catching a mild bid because sticky one hundred dollar crude fills their coffers, even as homebuilders like Lennar digest mortgage rates pushing well north of seven percent, which is definitely crimping buyer traffic at the model homes.

Grant Calloway

Before we break down the two sides of this debate, a quick word from our sponsor. You can keep your morning market briefing razor sharp and efficient before the opening bell with Jellypod at jellypod dot com.

Grant Calloway

Now, let's look at the argument brewing on the floor today, because Wall Street is sharply divided on whether Kevin Warsh made the right call or a massive blunder.

Grant Calloway

On the Bull side, the argument is that the Fed needed to show real backbone. By nipping supply driven price pressures in the bud early, Warsh is restoring central bank credibility. Bulls say that taking a quarter point pain now prevents a nightmare 1970s style stagflation spiral later, and eventually clears the runway for much healthier equity valuations.

Grant Calloway

But the Bears, uh, the Bears see a potential policy mistake in the making. They argue that hiking rates into a global energy shock, with diesel hitting six dollars a gallon and ten year yields at five percent, is going to crush consumer credit and force corporations to cancel critical capital projects. They worry the Fed is fighting yesterday's inflation while driving the present economy straight into a ditch.

Grant Calloway

Looking at the deck for the rest of today, we have initial jobless claims and the Philadelphia Fed Manufacturing Index landing at eight thirty AM Eastern. Then after the bell rings, we get key earnings results from FedEx and Darden Restaurants, which should give us a real time pulse on freight volumes and consumer dining out spending.

Grant Calloway

You know, standing on the floor of the New York Stock Exchange back in the day during rate hike cycles, whenever the ten year yield hit a major psychological threshold like five percent, you could literally feel the air leave the room. Traders start re pricing every single cash flow model in real time. It gets loud, it gets messy, but those are the moments that separate the disciplined investors from the noise chasers.

Grant Calloway

As always, remember that this podcast is strictly for educational and informational purposes only and does not constitute investment advice. Keep your head on a swivel out there, watch those yields, and I will catch you all tomorrow morning.