Fed Decision: Rates Could Keep Moving Upward as Markets Price in Higher-For-Longer

investing.com:

The stock market declined yesterday, coinciding with a rise in rates on the 5-year and 10-year Treasuries to their highest levels since 2007. Ahead of the Fed meeting, the bond market is signaling that rates will likely remain high for an extended period.

This is further evidenced by the Fed Fund Futures, which suggest that rates are expected to stay above 4% through 2028. I anticipate that the dot plots will echo a similar sentiment.

Fed Fund futures for December 2024 and 2025 show rates of 4.7% and 4.24%, respectively, which are up massively over the past couple of months. I would expect the Summary of Economic Projections tomorrow to reflect 2024 and 2025 Fed Funds rate similar to those value, if not even slightly higher.

Meanwhile, just about the entire real yield curve is above 2% out to 30-years, and if we assume a targetted inflation rate of 2%, then it would imply that nominal rates stay around 4% for a very long time.

However, the narrow spread between the Nasdaq 100 earnings yield and the 10-year real yield indicates that the equity market is not expecting the Federal Reserve to maintain high interest rates for an extended period. Rather, it suggests that the market anticipates the Fed will move to cut rates aggressively in the near future.

This implies that the spread between the Nasdaq 100 earnings yield and the 10-year TIP (Treasury Inflation-Protected Securities) must widen. For this to happen, the Nasdaq 100 earnings yield must begin to rise in parallel with both nominal and real yields.

Additionally, we’ve observed that since the end of July, the Nasdaq 100 earnings yield has been increasing alongside the 10-year TIP. Additionally, it appears the Nasdaq earning yield may be breaking out of a bull pennant,