The bond market is calling for the Fed’s bluff regarding a planned rate hike next year, and that’s setting stocks up for a gain in 2023, according to Fundstrat.

• According to Fundstrat, the bond market is fooling the Fed about its planned interest rate hikes for 2023.
• This is good news for the stock market, as investors will welcome a more dovish Fed.
• “The bond market called the Fed in 2022 and is now saying the Fed will be dovish in 2023…even if the Fed doesn’t know it yet,” Fundstraat said.

The bond market is starting to call the Fed’s bluff that it will still raise interest rates in 2023, according to a note Friday from Fundstrat, and that’s good news for the stock market.

The memo highlighted how the two-year US Treasury yield has a knack for exploring where the federal funds rate is likely to fall in the future, as happened in January this year when the two-year yield rose rapidly to around 1% while the federal funds rate remained unchanged. Fed funds are near zero.

Even Jeff Gundlach of DoubleLine Capital He said the Fed could be replaced With the two-year Treasury yield, as all the Fed is doing is following what the two-year yield is doing.

Fed Chairman Jerome Powell has been playing catch-up with rate hikes even today, as the two-year Treasury yield finally fell below the current Fed fund rate.

At this week’s FOMC meeting, the Fed projected the year-end 2023 federal funds rate at 5.1%, suggesting three more rate hikes of 25 basis points next year. But the two-year US Treasury yield has been declining since it peaked near 4.75% in early November, dropping to around 4.25% today.

That’s below the current federal funds rate of 4.38%, and that means the Fed will either pause rate hikes from here or even cut them, according to Fundstrat.

Fundstrat’s Tom Lee said: “In 2022, the bond market called for Fed action long before the Fed. And if that continues into 2023, the bond market says the Fed will turn dovish soon. And that’s good news.” for stocks.”

And the Fed has good reason to pause interest rate increases, according to Lee, as inflation is showing material signs of slowing from cycle highs and employment is starting to weaken.

“It will be important for the job market to soften and that’s what it shows… LinkUp sees a 4.1% drop in JOLTS for November. That brings total job openings down from 10 million to 9.9 million, the lowest level since early 2021,” Lee said. .

Lee explained: “The number of new jobs is the lowest since 2021. This is a two-year relaxation of the labor markets and, therefore, it looks like wage growth should slow in 2023. This is likely to prompt the Fed to be more dovish.” .

This lifts the stock market for gains in 2023 because investors are “very pessimistic” and the stock market previously saw gains during periods of similar economic pressures today, such as the late 1970s and early 1980s when inflation was high and the Federal Reserve raised interest rates dramatically.

In addition, corporate profits have exceeded the stock market’s gains since the end of 2019, which indicates that there is still an upward trend in stock prices.

Shares are up 25% since the end of 2019. [while] Earnings per share increased by 35%. Profits exceeded the price hike more than [the] For the past three years, Lee said, “the investment strategist expects the S&P 500 to jump 20% to 4,750 in 2023.