Market Insights
It’s FOMC Day!
Today marks the first Fed decision of 2023, and more importantly, the first since the market began obsessing over the “Fed Pivot”.
Enthusiasm over the pivot has driven the widest gap between FOMC rate forecasts and market pricing since last August’s fateful Powell pushback at Jackson Hole (Chart 1).
And once again markets have set us up for another Jackson Hole part deux.
Bullish retail sentiment, typically a contrarian indicator, has risen to its highest levels since last August into Jackson Hole (Chart 2).
Volatility has collapsed across macro markets in a sign of complacency in both equities (Chart 3) and crypto (Chart 4).
Furthermore, January’s Nasdaq gain was the largest monthly gain since last July – again right before Jackson Hole.
More ominously, the last time the Nasdaq saw double-digit January gains was in 2001, and we all know what happened after (Chart 5).
We wrote in our year-end piece that 2023 has echoes of the Dot-com bubble of the 2000s, and this analog is yet another sign of that.
We also wrote previously about why the Fed will have to keep the pedal to the metal on rate hikes – and today’s meeting will showcase that.
We have no doubt that Powell will push back against market pricing and sentiment – but the question is will markets take heed?
After today, we have to wait another 7 weeks before the next FOMC in March, and that gives plenty of time for markets to ignore Powell today and continue to hope that data will sway the Fed before March.
For today, we expect the messaging and tone of this meeting to be hawkish for 3 reasons:
1. The hawks on the committee would only have acceded to the doves to dial down to 25bp this meeting, only if the 25bp was conveyed as hawkishly as possible.
2. Q4 growth, wage and inflation slowdown, which has got the market all excited, has not been too different from what the committee had been forecasting, and we expect Powell to stress that.
3. Most importantly, there is a huge asymmetry in the balance of risks for the Fed. The Covid episode has shown the FOMC that stimulating the economy is not a problem for them – they are able to cut rates to zero and flood trillions in liquidity in an instant. However, taming inflation is a much more challenging task, and therefore we expect them to err to the side of overdoing the slowdown rather than risk an inflation resurgence.
Hence, we expect the committee to not even consider cutting rates until they actually see a 2% handle on inflation, versus the market which believes its the path that matters more.
This means the 75bp gap between the Dec 2023 Fed funds and the Dec 2023 Fed dots are overdone, as well as the over 200bp cuts being priced into the curve until end 2024.
Post-FOMC, we have a heap of 2nd tier data releases including the important ISM services and NFP.
However the decider will be the Valentine’s Day CPI – and we think there are upside risks to that release.
Firstly, the Cleveland Fed’s inflation Nowcast is showing >0.6% print for Jan, even if it has overstated inflation the past few months (Chart 6).
And less talked about is that the BLS is reweighting CPI towards services this year – with this being the first print, as we wrote about after the last FOMC: https://www.qcp.capital/market-updates/market-update-17-dec-22/
In Europe, a similar reweight has led to a surge in the January CPI released this week.
Hence, we expect downside risks to materialize from here – either at this meeting, or after the next CPI release.
While BTC risk reversals have sold off sharply since we highlighted the call skew last week, we believe it still represents good value for reflecting our earlier view.
This information contained in this website is intended as a general introduction to QCP Capital and its activities as a Digital Payment Token (DPT) service provider and is for informational purposes only.
QCP Capital is not acting and does not purport to act in any way as an advisor or in a fiduciary capacity vis-a-vis any counterparty. Therefore, it is strongly suggested that any prospective counterparty obtain independent advice in relation to any trading investment, financial, legal, tax, accounting or regulatory issues discussed herein. This website is only directed at informed and qualified investors. Your entry to this website attests that you are fully aware that trading of DPTs is not suitable for the general public and that you are an informed and qualified investor, and are also fully cognisant of all technological and financial risk(s) associated with trading Digital Payment Tokens.
In the event you intend to onboard with QCP Capital to trade in DPTs, by onboarding with us you acknowledge that you are aware of any rules and/or regulations applicable to the provision of DPT and/or financial services, the high degree of risk involved and that in no event will QCP Capital or any if its directors or employees be liable for any injury loss, claim or damage (whether direct, indirect, consequential or incidental) arising either directly or indirectly out of, or in any way connected with, the site, or its use.
If you are located, incorporated, or otherwise established in, or a citizen or resident of certain jurisdictions, QCP Capital may be unable to, or otherwise reserve its right to refuse to engage in or establish a trading relationship with you. Please contact us if you believe you have received this notice in error. QCP Capital is not registered or licensed to operate in the states of Louisiana and New York and will not be able to establish a trading relationship with you if you are resident, incorporated or have your principal place of business in New York or Louisiana.
You also acknowledge that you understand that trading in payment token derivatives (“PTD”) are also not any less risky than trading in DPTs. PTD services are not regulated by the MAS and QCP Capital is as such not licensed under the MAS to provide PTD services. You should only trade in PTDs if you are an Accredited Investor and/or have sufficient experience and knowledge in trading PTDs.
Risk Warning on Digital Payment Digital Services
The Monetary Authority of Singapore (MAS) requires us to provide this risk warning to you as a customer of a digital payment token (DPT) service provider.
Before you pay your DPT service provider any money or DPT, you should be aware of the following.
Your DPT service provider is an exempt payment services provider pending licensing under the Payment Services Act (2019) to provide DPT services. Please note that this does not mean you will be able to recover all the money or DPTs you paid to your DPT service provider if your DPT service provider’s business fails.
You should not transact in the DPT if you are not familiar with this DPT. This includes how the DPT is created, and how the DPT you intend to transact is transferred or held by your DPT service provider.
You should be aware that the value of DPTs may fluctuate greatly. You should buy DPTs only if you are prepared to accept the risk of losing all of the money you put into such tokens.
You should be aware that your DPT service provider, as part of its licence to provide DPT services, may offer services related to DPTs which are promoted as having a stable value, commonly known as “stablecoin”.
