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Market Update (FOMC Preview)

Published April 11, 2024
4 mins read

Article by [email protected]

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).

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).

Chart 2

Volatility has collapsed across macro markets in a sign of complacency in both equities (Chart 3) and crypto (Chart 4).

Chart 3
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).

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).

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:

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.

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