If I had to pick out one headline for the week that telegraphed a Powell pullback from his ultra-hawkish stance it was this one …
BlackRock economists are telling financial advisers that the next Fed meeting will include “Pivot Language” – Fox Business
If there is one guy that would know exactly what the Fed is doing it would be Larry Fink, Blackrock CEO … Remember The Federal Reserve BlackRock to billions of dollars of bond purchases including ETFs during Covid …
I would even go as far as to say that Powell is controlled like a puppet by Fink and the wall street banks …
Now Powell is getting pressured by senators Warren, Hickenlooper, and Brown to pivot away from tightening … Plus Cathie Wood from ARK investments
So, today I’ll lay out the reasons why Powell will pull back a bit on tightening and what happens next …
I believe Powell will open the door to a drop-down in rate hikes on Wednesday … A real surprise would be to only hike .50% instead of .75% like the Bank of Canada did this past week.
Although I believe he will still hike .75% and as you can see in the table below the eurodollar market is still pricing an 81% chance for the Fed to hike .75% …
Notice that it has come down from 95% just a week ago so you never know.
The Market Pricing for the December Meeting
As you can see below, December still favor a .50% hike and actually just yesterday the odds improved for a potential .75% hike …
So, it will all come down to Powell’s ability to sell a pull back in tightening without actually doing anything …
The key thing to understand is Powell wants a lower stock market so he does not want the market to think the Fed put below stocks is back …
He only wants to make sure the bond market does not come unglued the way the UK bond market did last week … In one day UK bonds rose 1.4% in yield as pension fund holders were forced to liquidate billions of bonds to meet a margin call.
Powell May Introduce his Version of Twist and Shout
Powell can add liquidity to the bond market by introducing operation twist (OT) … OT would allow the Fed to work with the Treasury to issue more short-term bonds and buy back longer-term bonds …
There is much greater demand for shorter-term bonds so this approach would improve liquidity in the bond market … It would also reduce long rates, which would help the housing market and improve valuations for mega-cap tech stocks …
What’s the Trade?
Adding liquidity to the bond market would also lower real rates, meaning the 10-year bond rate minus the inflation rate … This would provide a stimulus for gold and silver heading into their most bullish seasonal period of the year …
Yesterday I purchased a call spread in the SPDR Gold Trust ETF (GLD) to NOV18 expiry … I have booked some nice profits buying GLD and gold miner stocks near the low end of the trading range near $152 and selling them near the 160 level …
Here is a look at the charting pattern
The other positive for this trade is that GLD has the tendency to trade down into Fed meetings and rally out of them …
Bring It Home
This Fed will be highly active in the months ahead … They will be shifting from an aggressive tightening policy in 2022 to an easing policy in 2023 as the economy goes into recession …
They will also have to continue supporting the bond market with creative policy initiatives including yield curve control and modern monetary theory (MMT), which are all simply programs to allow them to print money …
When the Fed prints money it makes it very easy for traders to make money … That is if you understand how the Fed operates and how their money flows through the global financial system …
I see some major trends developing for the rest of this year and in Q1 ‘23 … If you are interested in learning how to trade the Fed and the major macro forces that drive the markets subscribe to Power Income …
Call 888-872-3301 and the Option Pit customer care team will provide all the information …
Have a great weekend and as always …
Live and Trade With Passion My Friend,
Griff