Chart of the Day - rates, camera, action!
The big event this week will be the FOMC meeting tomorrow. Not that the Fed is the only game in town, though in a dollarized global economy, right now it is the biggest game in town. Global central banks have been hiking short rates even if we have seen some policy easing in places like China. Those moves aside, the move by the Fed tomorrow & importantly the commentary on future moves, will be the trigger for risky assets for the next month+

The knee jerk reaction by many algos is to buy stocks ahead of the FOMC meeting. The Fed itself has put out studies about the positive drift into FOMC meetings. Presumably this is due to the perceived potential for dovishness. Perhaps, that is what took us higher yesterday. However, it would seem naive to think the Fed will be dovish in light of the comments after the July mtg, the August Jackson Hole, and the data we have seen.

The chart today shows the impact of rates on the other risky asset. For rates I have chosen the generic 4th contract of the SOFR futures which looks out 1 yr from now. So not just near term rate moves but the expectation of where they are going & staying. The risky assets I have chosen are those near & dear to all - Nasdaq, Bitcoin & Ether.

We can see on the far left, back in Covid times, the 12 month ahead futures rallied aggressively indicating rates were going lower quickly and staying there for some time. With a small lag, these long duration, risky assets were off to the races, led by stocks but ultimately surpassed by crypto.

This all started to peak in late 2021 when the rates in purple started to move lower. The risky assets followed suit, about a month later again and proceeded to move lower until the summer. At that time, the futures bounced a but as did risky assets.

The line on the right shows when the futures turned back lower in late July. a few weeks later the risky assets followed suit. These assets are clearly following the path of rates right now. This path has moved lower and begun to accelerate. It is well below the June lows. Will this continue? We will find out more about the path of rates in tomorrow's meeting & press conference.

This week will be all about rates. The path of forward rates will dictate the path of risky assets. It is time for rates, camera, action!

Stay Vigilant

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