Tilting the Odds

Amid the steep selloff in tech and especially semiconductors today to kick off the new month and quarter, it seems to be lost in the shuffle that both the banks and insurers (the latter on the ETF monthly chart, second below, breaking out) are rallying sharply.

Recall that both the banks and insurance firms are seen as "rate-sensitive," meaning that it is generally accepted their business models can initially benefit in a higher rate environment. 

Beyond that, the first graph, below, is from the CME FedWatch website which features the latest odds of looming policy. While a late-July FOMC rate decision still seems to favor standing pat, the all-important September FOMC now sees a probably rate hike, with the possibility of a jumbo 50 bps hike, to boot. 

Tech and semis, overall, have still missed the memo of Warsh's hawkishness, as the melt-up lends itself to complacency and the general idea that Jerome Powell's historic dovishness will remain in place at The Fed in perpetuity--Don't get me wrong, as I can easily see a future where Warsh pivots hard to the dove camp. But he does have a grace period as new Fed Chair to come in talking tough on inflation first, just like Powell did back in 2018. 

The bottom line is that banks and insurers are confirming the hawkish case here, while AI/semis have become so accustomed to blowing off every bear case, including higher rates. This time around, though, despite how many have been quick to claim Warsh is bluffing, the market continues to take a rate hike more seriously with the new Fed Chair.