Powell's Challenge

At today's FOMC decision, Fed chair Powell's primary intention and challenge is to sound positively hawkish; meaning to maintain the soft landing narrative, while pushing back against market (fed funds futures) pricing of 4-5 rate cuts in 2024. Powell's ability to convince markets will primarily depend on the interplay between the DotPlot (Fed members' forecasts for FedFunds rate) and the Summary of Economic Projections (SEPs)-- the average forecasts for growth, inflation and unemployment. 

New vs September DotPlot for 2024 

The current median of Fed members' FedFunds expectations issued in September stands at 5.1%, meaning policymakers were pricing about one rate cut for 2024. Today's meeting is expected by economists and strategists not the “market” to see the median dot plot dropping to 4.9%, meaning two rate cuts of 25-bps by end of 2024.  Again, the market (fed funds futures) are currently pricing between four and five rate cuts by end of 2024. 

What to Watch

The initial market reaction at 2:00 pm Eastern (7pm GMT, 11 pm Dubai) will largely depend on the outcome of the median dot plot.

Anything between 4.8% and 5.0% (two rate cuts) is expected by the consensus of strategists and economists and may trigger a short-lived selloff in indices, metals and lift up the US dollar.

Anything between 4.6% and 4.7% (three to four rate cuts) would be deemed dovish, particularly dovish and markets-friendly if closer to 4.6%. 

Subsequent market reaction will shift to SEPs on growth and inflation, with each number raising questions and drawing speculation, until Powell appears on the podium. Once again, Powell's challenge will be to push back against aggressive easing expectations on the basis of inflationary risks instead of recession or hard landing. 

About the Above Chart

The chart above shows the non-surprising relationship between the probability of a 25-bp FedFunds rate change at the March 2024 meeting. The current -0.45% -- indicating a 45% chance of a 25-bp cut-- is much less than the 75% probability of a similar rate cut seen last week, when gold and EURUSD were both higher. Watching the real-time development of this probability pricing will be crucial in gauging the evolving market reaction, and that's exactly what I'll be updating our WhatsAapp Bdcst Group members before and after the decision. 

Another thing (not on the chart) is that Bitcoin also peaked at the bottom of these FedFunds expectations for March 2024, whereas SPX and Nasdaq100 tend to show more resilience. 

Good luck to eveyone, and dont forget Thursday's BoE decision, especially after today's dismal GDP and industrial production figures. Once that's done, we move to the unimportant ECB decision before next week's crucial BoJ policy decision.

 

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