Morgan Stanely with more useful warnings for stocks:
For investors, 2022 should be called The Year of theFed with every meetingand communication more hawkish than the last. It’s almost comical how fast the markets’ expectations have changed in the past 4 months. After all, it’s not like inflation was dormant in 4Q21 (Exhibit 1). It’s fair to saytheFed missed the boat on inflation being transitoryand was slow to tighten policy. In fact, Chair Powell has admitted as much. However, it’s also fair to say the bond market completely missed the boat, too. Indeed, many bearish bond bets got run over last fall by a bond market that remained extremely resilient in the face of what was clearly a Fed that was behind the curve of inflation that was unlikely to be transitory. These mis-priced yields helped the S&P remain resilient which also ignored the growing risk of a more hawkish Fed in the fourth quarter of2021.
On that score, the internals of the stock market are once again diverging from the message from the bond market. More specifically, back end rates have had one of it’s largest 1 month moves in history as Fed funds futures catch up to reality. To be clear, we don’t have a bone to pick with this move higher in rates given the state of inflation and the Fed’s persistent attempt to convince the world they are going to do whatever it takes to quash it. However, we do question the bond market’s apparent view that the Fed can do this much tightening without impacting the economy in such a way that this path for rate hikes will be challenging to complete.
