Bloomberg wrote yesterday the NASDAQ 100 has outperformed the S & P 500 for 12 consecutive days through Friday, a streak matched just two other times in history. With eight trading days left in March, the NASADQ 100 Index is on track for its best quarter since 2009 relative to the S & P according to Bloomberg.
A major reason for the advance is the belief the overnight rate will be lower—perhaps around 4.0%–by year’s end. In addition to lower Treasury yields, which has improved tech’s intrinsic valuation, the market is already looking forward to 2024 where tech earnings growth is positive.
Today is the conclusion of a two-day FOMC meeting. The FOMC is facing a difficult task—decide whether to keep raising interest rates to cool inflation or take a pause to stem turmoil fueled by recent bank failures. As stated above, the market now sees the benchmark rate ending the year around 4%, while two weeks ago the terminal rate was close to 6.0%.
Today the Fed will also release an updated dot plot or where each Fed member believes where the overnight rate might be at year’s end. The Central Bank takes considerable effort to state that this is not a forecast but rather a sentiment indicator of each member.
As widely noted, the dot plot’s terminal year ending rate rose every quarter with the most recent one released in December suggested a 5.25% rate.
If the dot plot does not indicate a reduction in the rate or actually indicates a terminal year end rate greater than 5.25%, there is a strong probability volatility in the NASDAQ could sharply increase.
The FOMC is in a difficult position. Its inflation fighting credibility may be questioned if the policy or policy statement is viewed as too dovish. Conversely the Federal Reserve’s primary function is to provide financial stability, the definition of which has dramatically increased over the past two decades.
Commenting on yesterday market action, extreme volatility in short term government bonds continued for the ninth straight day as the outlook for US and European central bank rate increases remained in a flux.
The yield on the two-year Treasury increased by 21 basis points, its highest level in two sessions, but still nearly a full percentage point lower than two weeks ago. Germany’s two-year yield rose 26 bps to 2.62%–its biggest increase since 2008 according to Bloomberg,
At the time of this writing, the markets are suggesting around a four in five chance the Fed will increase its benchmark by 25 bps today, compared with less than even odds given last week and a higher likelihood of a half point increase the previous week.
As commented above, the markets are now looking for at least two quarter point cuts by year end from an expected peak in May.
Will this view change after 2:00 PM?
Equites led by the financials and technologies led a moderate advance.
Last night the foreign markets were up. London was up 0.03%, Paris up 0.32% and Frankfurt up 0.55%. China was up 0.31%, Japan up 1.93% and Hang Seng up 1.73%. Future are steady ahead of the outcome of the Fed meeting. The 10-year is off 2/32 to yield 3.63%. The two-year is up 4 bps to yield 4.23%.
