The upshot from last week’s FOMC meeting decision was that we got more dovish hikes from the Fed. The details have been scrutinized a lot and when you look at market rates now, the CME Fedwatch Tool says 85% odds that the Fed will not raise interest rates in May. This type of expectation is also reflected in the price market as Treasury yields have fallen:
10-year yields are hanging near their lows for the year near 3.30% and this is a key line in the sand to watch in the coming days/weeks.
Essentially, this seems to be the bottom line at which market participants will be convinced if the Fed will stick to its dot charts or if we will see a more dovish book coming i.e. the prospect of a rate cut.
Powell’s message to focus on the words “maybe” and “some” in this passage is sure to keep markets probing:
“The committee expects that some Additional policy stability maybe It should be suitable for a stance on monetary policy that is sufficiently restrictive to bring inflation back to 2 percent over time.”
However, policymakers still have a daunting task to bring inflation down toward the 2% target. There may be signs of easing price pressures but that does not mean their mission is complete.
As such, even if the markets aren’t aggressively pricing in price increases now, that doesn’t mean things won’t change in the future. I would argue that pricing these days is very sensitive and can quickly turn on a dime-a-dozen. So, don’t be fooled by what the markets are saying now as the situation can quickly reverse within a day or two.
It pays to be flexible in this type of trading environment. Right now, it’s about the next big data and/or risk event. US banks will continue to be heavily scrutinized but if sentiment continues to rise, we will have to work with major data releases to get a better idea of when the tightening cycle will end.
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