Fed Day Frenzy
Predicting the unknowable...
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Today’s note will be short, as markets have been largely in a holding pattern this week, waiting for the Fed's decision tomorrow.
Interestingly, the market is still quite uncertain about the Fed Meeting’s outcome.
Having the odds split this closely the evening before the decision is a surprise. In the recent past, the Fed has always found a way to leak their intentions to markets a few days before the decisions. This is because, in general, the Fed wants to minimize the element of surprise markets experience from their decisions. Surprise leads to volatility, and volatility leads to unintended consequences.
The Fed’s comfort with the market being this divided suggests one thing to me: they themselves aren’t sure of their next move.
The Fed is satisfied with this market pricing.
So, the stage is set for some volatility tomorrow, as neither result is clearly priced in.
Rate Cut Roulette
How many times have you had a friend bring you an impossible dilemma, one which they feel utterly unequipped to handle, asking for your advice? It’s probably happened a thousand times.
As often as not you know the choice they are going to make before they do. Even as you watch them agonize over the decision.
That’s a bit how I feel about the Fed this week. They may well be inwardly torn, but I believe Powell wants to cut 50bps, and I see no reason to believe Powell won’t get what he wants in the end.
As an aside, I believe Powell is right to cut 50bps.
The more interesting question is: if the Fed decides to cut 50bps, how will the markets react?
Over the last week and month, the equities that have performed best have been large, low-volatility, profitable, quality companies.
Industry-wise, we have seen “defensives” like consumer staples, financials, utilities, and high dividend companies do well.
Bonds also have been up only for months now.
Meanwhile, with the exception of Gold, commodites have struggled.
And QQQ, everyone’s favorite ETF just 3 months ago, looks weak.
Predicting the Unpredictable
My best guess for tomorrow is as follows:
The Fed cuts 50bps, with dot plots that imply another 50bps could be on the table. The Fed essentially says “Goldilocks at any cost,” implying that they are 100% committed to doing what it takes to avoid a recession.
The market listens.
We start to see a reversal of all the trends I discussed above. QQQ becomes a favored son again, commodities begin to rip, bonds reverse, and all the “defensives” see a sharp deflation.
Gold first rallies on the news, before starting a bleeding process that confounds everyone. Maybe it even sharply sells off. Why? Positioning.
2024 has been the year of the front run. This month we have been aggressively front-running a steep Fed-cutting cycle and the associated economic weakening it implies.
It’s time for a reversal.
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