As is often the case, the real driver of the stock market is actually the bond market.
The Fed's skimpy quarter-point rate increase on Wednesday, and chair Jerome Powell's clear acknowledgment of the inflation slowdown, have investors betting that few — if any — hikes for the Fed funds rate are still to come from the central bank. We know this from looking at data from the market for Fed funds futures, where investors speculate and hedge positions using futures contracts on the short-term rate that the Fed raises to slow the economy.Data provided by the CME Group, where Fed funds futures trade, show the market-implied odds of the Fed funds rate hitting 5% at the central bank's May meeting have fallen rapidly in recent months.
Now, the futures market puts odds of the Fed raising the rate to 5% — that would likely be a quarter-point increase at the next two meetings — at basically one in three.Decent Q4 earnings reports, coupled with easier-than-previously-thought Fed policy and better-than-expected gross domestic product numbers, have given the markets a heckuva lift to start the year.Not everybody believes this rally is for real.
"What's happening now is just another bear market trap, in our view, as investors have been forced once again to abandon their fundamental discipline in fear of falling behind or missing out," Wilson wrote earlier this week.
Day late.