Macro the week ahead

U.S. PCE Inflation, Fed Chair Powell Speech, BOJ Meeting Minutes: Macro Week Ahead

By:Ilya Spivak

Stocks are at risk as markets struggle to rebuild risk appetite after dovish guidance from the Federal Reserve

  • Stocks, gold and the U.S. dollar fail to find follow-through on dovish Fed guidance
  • Minutes from the Bank of Japan policy meeting might catalyze the Japanese yen
  • U.S. PCE inflation data and a speech from Chair Powell come amid market closure

Looking at weekly performance statistics, financial markets were defined by a dovish lead from the Federal Reserve last week.

The central bank stuck to its forecast of three interest rate cuts for 2024, even as it upgraded growth and inflation bets when it updated its Summary of Economic Projections, alongside the policy announcement on March 20.

Stocks rose, with the bellwether S&P 500 adding just over 2% and the tech-tilted Nasdaq 100 up nearly 3%. Treasury bond yields fell at the front and back end of the curve. Two- and ten-year rates declined 2.9% and 2.5% respectively. The U.S. dollar weakened against all its major peers except the Japanese yen, where the Bank of Japan was in focus.

Did markets really cheer a dovish Fed?

That seems deceptive, however. Looking beyond the markets’ initial kneejerk reaction to the Fed’s pronouncements, a hugely different picture emerges. Wall Street failed to follow through, with stocks returning a flat result in the two days after the rate decision. The greenback rose, and gold prices fell.

Interestingly, yields continued to slide but the losses were concentrated at the long end of the curve, with the 10-year rate down 1.8% in the last two days of last week’s trade while the two-year shed just 0.4%. This was the inverse of what happened in the Fed’s immediate aftermath, where near-term rates underperformed.

Perhaps most tellingly, the priced-in policy path stands little-changed. Fed fund futures are pricing in 70 basis points (bps) in rate cuts for 2024. That is a mere 3 bps away from the 73b-ps tally where markets settled after Chair Powell and the Federal Open Market Committee (FOMC) had their say.

This leaves the markets wrestling with a critical question: was the expectation of Fed stimulus the sole driver of the upswell in risk appetite since November 2023, and if so, is that tailwind now exhausted?

Here are the macro waypoints that are likely to shape price action in the week ahead.

Bank of Japan (BOJ) summary of opinions

The Japanese yen slumped last week after the Bank of Japan (BOJ) lifted its target interest rate from negative territory and retired the policy of yield curve control (YCC), a cap of 0% on the 10-year Japanese government bond (JGB) yield, as widely expected. Dovish rhetoric alongside these moves signaled rapid tightening is unlikely.

From here, traders will be keen to digest an editorial summary of the proceedings from this month’s fateful policy conclave to gauge BOJ official’s reaction function going forward. If BOJ appears prepared to keep raising rates amid signs of returning economic vigor, the yen may rise.

Japan OIS-implies interest rates
Source: JPX

U.S. personal consumption expenditure (PCE) data and Fed Chair Powell's speech

The Fed’s favored measure of inflation is expected to show that core price growth held steady at 2.8% year-on-year in February while the headline reading inched up from 2.4% to 2.5%. Fed Chair Jerome Powell will speak at the central bank’s San Francisco branch on the same day.

Gauging the markets’ reaction to what happens here will be challenging because U.S. markets will be closed for the Good Friday holiday. Over the counter (OTC) markets, like spot foreign exchange, will be nominally open, but liquidity is likely to be so thin and participation so limited that any trend development will be forced to wait until the following week.

U.S. PCE Price Index Y/Y
Source: BEA

China purchasing managers index (PMI) data

China is expected to report that service-sector activity growth accelerated in March while the manufacturing side has nearly arrested months of decline with a return to neutral. If the “dovish Fed” narrative has truly run aground, gauging whether a pickup in the world’s second-largest economy can uplift risk appetite may be broadly telling.

China PMI - CFLP
Source: CFLP, NBS

Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

For live daily programming, market news and commentary, visit tastylive or the YouTube channels tastylive (for options traders), and tastyliveTrending for stocks, futures, forex & macro.

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