Wednesday's Market Minute: Prepare For Hawk & Awe

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Stocks stumbled to start this holiday-shortened week and the culprit seems obvious: Top Gun: Mav—no, just kidding, enough about that (awesome) flick. It’s inflation.

It’s not a coincidence that Treasury bonds closed out May with the second-biggest sell-off of the month as Federal Reserve Chair Jerome Powell went to the White House to meet with President Biden about their plan to combat inflation. Their plan is: hike rates. Cull demand. Try not to make the situation even worse. Powell’s already told us this all year, but the President drove the message home even harder with a Wall Street Journal op-ed over the weekend that was strikingly direct in its message to investors that the past economic regime of low rates and slow growth will not be the future.

At the same time, Treasury Secretary Yellen gave an explicit mea culpa for being wrong on the notion of “transitory” inflation. A cynic might say the President is setting up his economic team for the fall, should things get worse. It doesn’t really matter for traders. The reality is that policymakers are united in their message to at least symbolically do everything they can to try and get inflation down, and there’s not much they can do besides hike rates.

As long as our PMI and ISM numbers remain in expansionary territory, bond yields will likely continue climbing. If the 10-year yield gets back above 3%, the dollar is likely going higher with it, and stocks would almost certainly remain under pressure.

Unless the employment situation drastically deteriorates, hopes the Fed might change its tone are fantasy. Biden singles out gasoline prices every time he speaks on the subject, and they keep going up. Agricultural commodity prices are also hovering near recent records. Everything is going exactly the way the President was hoping it wouldn’t.

If there is any change in tone from Chair Powell in the near future, it will be hawkish. That could mean cementing late August or September hikes, putting 75 basis points on the table for June, or adding more bonds to the tapering program that's about to kick off. A common refrain from cynics who think the Fed just wants to keep stocks higher is that the Chair will be dovish because he "wants to keep his job." Today, it's the opposite – and it's not just Powell's job at stake. It sounds like Biden and Yellen believe theirs may be, too.

This post contains sponsored advertising content. This content is for informational purposes only and not intended to be investing advice.