Mr. Market doesn’t appear to be expecting a Fed rate hike in June, although more and more signs point to the Fed becoming incrementally more hawkish. Consumer data is improving, although with a few hiccups, but Bank of America Merrill Lynch strategists are reminding investors about the December rate hike, which came after signs and comments that are similar to what we're seeing and hearing today. They also warn that a summer Fed rate hike would likely be a shock to the U.S. stock market and that a virtual free-for-all may ensue.
Fed rate hike November deja vu
Strategist Savita Subramanian and team noted in their May 27 Strategy Snippet report titled "A summer hike could surprise stocks" that in November, the capital markets were discounting a hike five months from then based on the Fed Funds futures rates, and this is happening again now. Also in November, the S&P 500 was at around 2100, just as it is now, and VIX levels were about 14, which they are now as well. Further, the Fed hiked interest rates in December—only one month instead of five months later.
The BAML team adds that although there were other factors that contributed to the decision to hike rates, "history is rhyming, and we think a rate hike this summer could drive some downside." They said the Fed Funds futures rate before the middle of this month implied that Mr. Market saw little or no chance of a rate hike over the summer. However, the FOMC's latest meeting minutes have increased the implied probability of a hike in June to 30% and a hike in July to 50%.
S&P 500 not priced for summer Fed rate hike
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