- Fed Expected to Raise Rates
- Mounting Credit Card Debt as Inflation Outpaces Wages
- Bitcoin Breakdown
For the first time since July, the FOMC will formally meet this week where they are expected to raise interest rates another 0.75 basis points to 3.25%. Back in both June and July, the Fed raised rates by the same amount at each meeting and this would mark the third consecutive three-quarter point hike. Central banks around the world have also been raising rates this year. In fact, 90 other central banks have increased rates with approximately half of them doing so with at least one 0.75 basis point hike. Put differently, the global effort to tame inflation is in full effect.
While there will be some other data released this week such as housing starts and existing home sales, all eyes will be on Wednesday’s rate decision. We’re already seeing consternation over the announcement in premarket trading where the S&P and Nasdaq are each down a little less than 1%. Bond prices are also falling with yields on 10-year notes at roughly 3.47%.
The real world implications of inflation and rising rates are becoming more and more evident. Aside from higher prices for food and energy supplies, we’re also seeing credit card debt begin to mount. A recent report shows the number of people with credit card debt that’s lasted a year is up to 60% from 50% a year ago, while those in debt for at least two years is up to 42% from 30%. Rising inflation and wages that are not keeping pace is leading more people to use credit cards to pay increasing expenses. Making matters worse is what getting inflation under control may actually mean.
To get inflation back down around 2% may take a significant slowing of the economy. Many economists are predicting that could result in anywhere between 3 – 3.5 million U.S. jobs lost. Such losses would likely push the economy to the brink of recession, if not into an actual one.
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Aside from falling equity prices and rising interest rates, we’re also seeing weakness in crypto assets. Bitcoin is trading around $18,600 in premarket hours. The fall below $20,000 is indicative of investors becoming more concerned about markets in general. As I’ve often mentioned before, bitcoin has come to represent a measure of investor confidence with $20,000 being a threshold delineating optimism from concern.
Last week was a rough week with equities giving up over 5%. Volatility remains high heading into this week. The VIX is trading over 27.5, which is well above its average by nearly 50%. Therefore, we could be in for another choppy trading session. Since their August highs, the S&P 500 is down approximately 10% while the Nasdaq is down over 13%. For longer term investors, these large swings can be disconcerting but they can also offer opportunities on assets whose valuations have fallen. If you’re an options trader, the high levels of volatility mean option premium is expensive and there is potentially significant opportunity. Regardless of trading style, panic has never made a trader or investor better and I doubt that will ever change.
tastytrade, Inc. commentary for educational purposes only.