Position For Two Fed Cuts This Year
Position For Two Fed Cuts This Year
The dot plots only show one, but the market reaction is telling.
On Wednesday, we had a bumper afternoon of US inflation followed by the latest US Fed meeting. The cross-asset move in reaction to both events has thrown up some opportunities to take advantage of.
To close out the week, we wanted to run through the reaction across the equity, bond and FX space, along with our take from it and some trade ideas.
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Recapping the session
Inflation came in at 3.3% vs 3.4% exp, with core MoM at 0.2% vs 0.3%. This was a welcome move lower, which saw equities rally, yields fall and the US Dollar sharply sell off.
Prices then steadied as we went into the Fed meeting, which saw the median dot plot move to expecting just one rate cut for this year. However, the bunching for 2025 moved higher to four cuts from three previously. Full graphic in detail is shown below.
This is where the cross-asset move diverged post Fed…
US Dollar Index (DXY)
The DXY didn’t manage to recoup the inflation driven losses from the Fed driven gains. From trading above 105.10 just before the inflation print, London opened Thursday morning at 104.80.
US Equities
The inflation print came out before market open, but you can note the jump on open in the S&P 500 below. There was only modest Fed related selling, and the index easily closed above 5,400 points, a new record.
US 2yr Yield
The 2yr had threatened to take out key resistance at 4.90% after NFP from last Friday. After pulling back earlier this week ahead of the inflation print, we were watching it closely as a beat would have likely seen us take that out and head to test 5%.
This didn’t prove to be the outcome, and we saw a low of 4.67% before a partial reversal. As with the DXY, it’s telling that we didn’t get a full reversal to end the session where we started it.
Our thoughts
Equities had the best day and we think this is justified. We’re in a situation whereby inflation is doing its best to tick modestly lower. Even though it’s unlikely to get down to 2% anytime soon, even at current levels it’s conducive for corporates to operate at without having major price pressures.
This leaks over to the consumer too. At current levels we don’t feel the consumer will feel the pinch enough to cut back on discretionary spending, which should help retail sales and consumer confidence data in coming months. If correct, the data releases again should cause a positive move higher in the equity space.
As for the reaction to the Fed meeting, this is where equities held up better than in FX or the rates space. Even though the lack of dovish chatter would normally be negative for stocks, we think the lack of a sell off speaks more to the apparent strength of the economy.
For example, part of the lack of desire for imminent cuts comes from the GDP projections for the US. The latest forecasts indicate a 2.1% growth this year in GDP, so zero chance of a hard landing recessionary curveball. Without this risk, yes it means the potential for higher for longer rates, but if the economy is growing then the stock market should be supported.
We feel there’s also the element of equities shrugging off almost anything that comes its way, with a strong investor base ready to buy any dips. Even though you could make a case for wanting to short the NASDAQ via $QQQ, you’d have lost money from almost any entry with a medium term time horizon over the past year. Listen to Bart…
