Trader Insights: A permissive Fed is a green light

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We have experienced the FOMC meeting and important risk events this week, and the majority of investors have heard the news they want to hear - the Fed is tolerant of inflation, and although the two CPI data are hot, their thinking has not changed much. .

Wrapping up the meeting, our core guidance is on the direction of interest rates and bonds, with U.S. rates expected to add another 10 basis points of cuts by December (now expected to bring a cumulative rate cut of 83 basis points), and there may be 25 basis points of interest rate cuts at the June FOMC meeting. The probability of a 1 basis point interest rate cut is 84%.

The U.S. 2-year Treasury bond fell 8 basis points on the day, the yield curve flattened, and the U.S. 5-year real interest rate fell 10 basis points. Positioning may have played a role here, and those betting on a change in the median Fed forecast (down to 2) had to quickly reconsider their positions. The net movements in the market tell us how most people view the Fed meeting, and the rebound in risk assets is evident.

Markets give full consideration to the Fed's forecast for the federal funds rate, known as the "dot plot," as well as its economic forecasts. The upward revision to the 2024 GDP forecast from 1.4% to 2.1% is shocking, as 1.8% is considered the upper limit of economists' expectations. The slight revision to 2024 core PCE guidance to 2.6% is slightly above consensus, but the fact that the midpoint for 2024 remains (barely) at 3 rate cuts is the main focus of the market.

In an almost binary world, the market just wants to see if the Fed's median forecast lowers the number of rate cuts from three to two in 2024.

Looking at Chairman Powell's speech, he believes that a strong labor market may not hinder a rate cut, which is a major positive for risk bulls.

Furthermore, from the Fed's central point of view, it appears that they will ignore the recent sustained rise in inflation, believing that inflation will tend to decline over time, which is enough to put risk assets on the radar again.

Concerns for Hawks/Shorts

That’s not to say there isn’t new news for currency hawks or financial market bears to take advantage of – the average Fed rate forecast rose 10 basis points to 4.8% in 2024, and we’ve seen them move from 2025 to 2026 One interest rate cut is removed from the forecast for 2020. The long-term point estimate, considered a neutral setting, was revised upward to 2.6% (from 2.5%).

Overall, the market is hearing the Fed wants to ease policy...maybe the data isn't quite there yet, but they are ready and hoping to do so, maybe in June. This decision may be affected by March non-farm payrolls data (April 5), US CPI data (April 10) and PPI data (April 11).

Interest rate/bond movements serve as a guide to the broad market - USD sold off broadly, with some bullish buying in BRL, ZAR, NOK and AUD. Gold has gained $30 since the Fed statement and holds on to new all-time closing highs, with bulls eyeing a retest of $2,195. The cryptocurrency has regained some of its lost momentum and we are seeing renewed interest from the bulls, although more needs to be done to get this growth moving.

The equity bull market has revived, with a range of our European share indexes hitting new highs, and the US30 and US500 indexes also hitting all-time highs. The rally was well-attended, with 75% of stocks in the S&P 500 closing higher on the day, led by consumer discretionary, services and financial stocks. Cash volume remained consistent with the past 30-day average.

Small-cap stocks performed well, with the US2000 index closing up 1.9% and expected to exceed 2100. Regional banks were at the core of this market.

Granted, markets have a habit of taking a different view the day after a Fed meeting, and price action needs to be watched closely, but for now, bulls are feeling a bit of relief - a sentiment that should spread to Asian markets, where the JPN225 index broke to new highs , HK50 and ASX200 also had constructive openings.

Despite this, we still maintain our focus on central banks. The central banks of Switzerland, Norway and Mexico will all hold policy meetings. The Bank of Mexico may cut interest rates by 25 basis points, while the Swiss National Bank's 25 basis point interest rate cut is a high-probability event.

(The above analysis comes from Pepperstone analysts)

Article forwarded from: Golden Ten Data

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