Markets traded nervously higher ahead of the outcome of the two-day FOMC meeting. Today’s highly anticipated decision will help shape the outlook for interest rates for the remainder of the year.
The markets were convinced the Fed would start cutting rates this week and are painfully surrendering to a higher for longer reality. Treasuries are around the highest yields for the year and the Magnificent Seven, dubbed the “most crowded trade” struggled.
The markets are now anticipating a more hawkish stance given the recent inflation data. It is still widely believed the Committee will lower interest rates by 75 bps this year, a view that has been consistently espoused by FRB members. The question is perhaps what the outlook for will be for 2025.
Perhaps the larger question, will or is the Fed losing credibility?
As widely discussed, the market was adamant in its view the overnight rate will be reduced by 150 to 175 bps in 2024, a reduction over two times greater than the Fed’s outlook. Did the market attempt to “jawbone” the Fed, and in reality, it is the market that is losing or has lost credibility?
Market mechanics have changed radically over the last 10 years. Approximately 90% of equity trades and 99% of Treasury trades are done algorithmically or via technology, trades largely based off momentum and five-word headlines. Indexing is the strategy versus a strategy where price discovery is absent.
The argument stands that if one can control market headlines, one would be able to dictate market direction. As noted the other day, according to Bloomberg’s propriety algorithm, Natural Language Processing (NLP), there are more than 60,000 headlines stating the FRB is headed to a rate reduction in July.
Will the FRB validate this forecast?
The announcement will be made at 2:00 P.M.
Last night the foreign markets were mixed. London was down 0.17%, Paris down 0.57% and Frankfurt up 0.21%. China was up 0.55%, Japan up 0.66% and Hang Seng up 0.08%.
Futures are flat. The 10-year is up 3/32 to yield 4.28%.
For what it is worth department, Bitcoin is around $61,000, down from $73,800 last week. It is still up about 124% in the past year, partially predicated upon January’s release of the first ETF as well as the upcoming halving—an even written into Bitcoin’s code, which effectively slows the supply of digital coins onto the market. Wow! Talk about the volatility of change.
