Read on the Trading Floor - 14 Dec 2023
Today’s focus… Powell pivots as Lagarde/Bailey pushback
Macro Themes At Play
Theme 1 - and you thought JPow wouldn't be able to stick the soft landing
Theme 2 - If the Fed is easing, where do you want to invest your money?
Theme 3 - Hawkish CB's in Europe...
Theme 4 - Will 10 years stick sub 4%?
Further reading and listening of note
Theme 1 - and you thought JPow wouldn't be able to stick the soft landing
It is most certainly the season of good will and cheer, and boy did JPow deliver. The arch dove showed his true colours, setting the world a blaze with cuts and comments...
Policy "well into restrictive territory"
"Very focused on not making the mistake of keeping rates too high for too long"
They will need to cut well before 2% target is reached
“Cuts are beginning to come into view and are now a topic of discussion”
The Macro Compass believes the Fed doesn’t want real Fed Funds at 3%+ (too restrictive) but at 1-1.5% (mildly tight).
Source: The Macro Compass - The Pivot Is Here
As a result today has been a race for strategists to mark to market their rate cut expectations (Bloomberg - Goldman Sachs Revises Fed Call, Now Seeing ‘Earlier and Faster’ Cuts).
In terms of short-term positioning, Powell has hurt a few participants, delivered a few bags of coal to those on his naughty list who had the audacity to think he might be hawkish!!!! Some entered the event paid front end US rates, looking for a September repeat... H4L and pushback against the excessive easing priced into the curve. I guess the way BoE and ECB behaved despite substantially weaker backdrops.
Furthermore, the market is not positioned for this move in EURUSD. At 1.08 the Q1 focus was lower, as the diverging growth, inflation and fiscal dynamics on opposite sides of the Atlantic led to premium being spent on sub 1.05 strikes for the end of Q1. Afterall, if the US needs 75bps, Europe will need more and sooner but Lagarde failed to match let alone beat JPow's dovishness. EURUSD is sometimes the worst way to play European growth dynamics, as it sits in the middle of the ACB recycling basket and the single ccy is forever the anti-USD before it is a play on European growth.
Theme 2 - If the Fed is easing, where do you want to invest your money?
Pre-meeting
highlighted their study which shows the 90.90% likelihood of a new high printing after unwinding the recent bear market decline... (Nautilus Research - The "Magnetic" Attraction of Prior All Time Highs)The Gryning Times - (No More Resistance?) highlights the Russell 2000 is 26% away from the all-time highs marked two years ago.
"there's one major data point for markets between now and year end, and it's the Fed's favored inflation gauge, core PCE. But now we don't have to wait for it. Powell leaked it yesterday afternoon, in his press conference prepared remarks - they expect it to have fallen from 3.5% to 3.1% year-over-year."