The Federal Reserve and the stock market are now dangerously misaligned, according to Rabobank.
Strategist Michael Every warned the US central bank looks likely to stay hawkish and continue hiking interest rates aggressively.
“Someone, either the Fed or Mr Market, is going to melt like an ice-cream cone, and soon,” Every said.
The stand-off between the market and the Federal Reserve is unlikely to end prettily, according to Rabobank.
Strategist Michael Every said it will be impossible for the bear market rally to continue if the US central bank keeps up its recent hawkish messaging.
“The Fed rates message should be clear, but the market isn’t buying, but rather selling it,” Every said in a recent research note. “Someone, either the Fed or Mr Market, is going to melt like an ice-cream cone, and soon.”
In July, investors appeared unphased by the Fed’s monetary tightening – even though it hiked interest rates by 75 basis points for a second consecutive month.
The rebound was sparked by an assumption that the Fed isn’t wedded to hiking rates by 75 basis points indefinitely. Chairman Jerome Powell said that the central bank plans to take a “data-driven approach” to interest rate rises after the conclusion of July’s Fed Open Market Committee.
But the Fed could still remain hawkish, according to Every. In recent days, St Louis Fed chair Jim Bullard said that a 50 basis point hike in September is likely, while San Francisco Fed president Mary Daly warned that the US is “nowhere near” finished in its fight against inflation.
“We just got yet more hawkish Fed-speak,” Every said.
“The US stock market wasn’t thinking about any of them, with yet another super soar-away summer special performance,” he added. “Yet like a doomed teenage summer romance, enjoy that kind of thing while it lasts.”
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