The 2-Year and Fed Funds Rate, Small Businesses’ Pessimism and Hiring Plans and Investor Sentiment as an Indicator

The Federal Reserve raised the Federal Funds rate by 0.75% on Wednesday, further accelerating an already aggressive tightening cycle. Financial conditions have already tightened significantly and the FOMC indicated that they will continue to tighten until headline inflation begins falling. While Friday’s high inflation print was worrisome, recent changes in inflation expectations may have had a higher influence on the FOMC’s thinking. Small businesses have a pessimistic outlook for business conditions, but they still plan to hire in the future. U.S. oil refining capacity is one million barrels a day lower than it was just three years ago. Global fund managers report the lowest risk appetite since 2008.

1. Wednesday capped off the fastest 5-day increase in 2-year Treasuries since the 1980’s:

2. The market now expects a 3.5% Fed Funds rate by the end of the year:

3. Financial conditions are approaching the higher end of “normal” for the past decade:

4. Federal Reserve economists worry about the “inflation mindset” becoming engrained in society:

5. May was the most pessimistic reading of small businesses outlook in the history of the NFIB survey…

6. But hiring plans rose back to elevated levels:

7. Although the falling compensation plans index may indicate a relatively less competitive job market:

8. Lower refining capacity is why rising gas prices have outstripped rising oil prices:

Source: The Daily Shot from 6/15/22

9. “Price drives sentiment”—Sentiment has fallen dramatically for both retail and professional investors. It’s worth noting that the market consistently bottoms before sentiment and being contrarian at extremes generally pays off.