I don’t know about you, but I am looking forward to Wednesday’s FOMC meeting. We have spent what seems like an eternity debating the timing of the Federal Reserve’s move off of the zero interest rate. And just when it seems like it might finally be settled, guys like DoubleLine’s Jeffrey Gundlach wade back into the fray, and make provocative claims that rekindle the market’s hope the hike will once again be put off.
I understand why Gundlach is making this statement. Credit markets are trading like the Grim Reaper is at the door.
High yield and junk bonds are once again making new lows.
Even though markets are struggling, it would be a colossal error for the Fed to delay tightening again. They have already lost a tremendous amount of integrity with their previous withdrawal of higher rate guidance. Doing it twice would be a disaster of William McChesney Martin proportions.
I doubt the Fed will make that mistake. I am sticking to my call the Federal Reserve will hike in December in the most dovish way possible. I don’t know exactly how they will accomplish this feat, but they will somehow communicate a bias against tighter monetary policy that will reassure the markets.
My plan has been to err on leaning short going into this week. So far, I have been lucky enough to get that call right. But in the coming days, I am going to cover and get longer in anticipation of a rate hike that is built into the price.
Although I am sympathetic to picking away at stocks, selling US dollars is probably the better trade. Everyone is long the dollar, and I don’t recall there ever being a better “buy the rumour, sell the news” setup.
Not only that, if by some outside shot Gundlach is right and the Fed passes on raising rates, I am less sure the stock market will react positively than I am the US dollar gets completely blasted.
Thanks for reading,