No pivot.
Powell raises rates.
Conditions continue to tighten.
Risk comes off.
That is where we end up Wednesday.
All the talk of a pivot fails to take into account what the ECB did recently with a 50bp hike and a fairly cautious statement following.
It fails to take into account every speech that Powell has given this year stating that they will keep going until the job is done.
It fails to take into account that central bank action with respect to facilitating backstops for banks can function independently of monetary policy. A point I'm sure Powell will make on Wednesday.
In fact, if you look at the proactive stance the Fed is taking towards attempting to mitigate the banking crisis, it directly reflects their desire to do so with the understanding that by taking such a stance it won't interfere with their inflation fight.
The perfect decision on Wednesday would be a 50bp hike. It would tighten policy to the point that the bond market would have no choice but to rally for fear of over-tightening, allowing bank balance sheets to breathe, while showing the markets that the Fed has the utmost confidence that the current banking situation is very well contained.
Powell being the bureaucratic version of the Cowardly Lion from the Wizard Of Oz, of course, will go with a 25bp hike because it falls exactly into a middle ground type of decision.
Investors are bidding up stocks presently with wishes of a pivot, thinking that the banking crisis will force Powell into a policy error.
While a pause in rate hikes or a cut would be initially greeted by a barnstorming rally, it would create a great deal of fear in the markets as they would naturally demand more in the days and weeks to follow. It would also create absolute bedlam in the bond market, as rates would spike, recognizing that a hyper-inflationary cycle is now a possibility.
With all of this said, here is how investors are approaching Wednesday's event, bearing in mind that last week saw a record spike in SPY inflows among other signs of bullish QE driven euphoria.
The put/call ratio cratered today, closing near 1 year lows, as investors have no choice but to hitch their wagon to the QE horse, in hopes of a fruitful ride ahead.
Unfortunately, the ride ahead will be anything but fruitful as we close out this week. The cart is about to flip, injuring riders who will walk away dazed and despondent.
Plan accordingly.
We remain bearish after having liquidated our long positions in late January, moving to a net short position shortly thereafter.
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