uploaded image

Federal Reserve Preview: Stocks in Trouble if the FOMC Dials Up Hawkish Tone

By:Ilya Spivak

Stock markets wobble as more hot inflation data eats away rate cut expectations on the eve of a pivotal Fed policy decision

  • Wall Street bleeds out as employment cost data tops expectations.

  • The priced-in Fed outlook now questions seeing even one rate cut in 2024.

  • The FOMC policy decision and Jerome Powell’s press conference are now in focus.

Stocks swooned on the final day of April as Wall Street looked ahead to a much-anticipated monetary policy announcement from the Federal Reserve’s rate-setting Federal Open Market Committee (FOMC).

The bellwether S&P 500 equity index is on pace to close with a loss of over 1%. The tech-tilted Nasdaq and the small-cap Russell 2000 face heavier selling, tracking 1.3% and 1.5% lower into the final hours of the session. The blue-chip Dow Jones Industrial Average splits the difference with a loss of close to 1.2%.

Hot U.S. inflation data spooks markets again

The selloff began as first-quarter U.S. Employment Cost Index (ECI) data came across the wires. It showed that labor costs rose 1.2%, topping expectations penciling in a rise of 1% and marking the largest increase in a year. That amounted to a rise of 4.2% year-on-year, matching the fourth quarter and breaking a two-year disinflation trend.

US Labor Supply/Demand Balance vs. Inflation
Source: BEA, BLS

Financial markets responded with a hawkish shift in the priced-in monetary policy outlook. Fed funds futures are now pricing in just 23 basis points (bps) in rate cuts for 2024. This means the probability of even a single rate cut has been called into question, though the likelihood of a reduction by the end of the year is still a commanding 92%.

All eyes now turn to Fed Chair Jerome Powell and company.

The ECI figures are just the latest in a series of hotter-than-expected inflation measures eating into stimulus bets. Consumer price index (CPI) and personal consumption expenditure (PCE) figures—the quarterly version baked in into gross domestic product (GDP) reporting as well as the monthly gauge—have told a similar story.

Stocks brace for impact as Fed rate decision looms

Comments from Fed officials in recent weeks have started to signal a hawkish rethink is afoot. For stocks, the downside risk lurks in the possibility that policymakers will open the door for scrapping rate cuts altogether, or even suggesting a hike in rates this year has become a live consideration.

Wall Street may cheer if central bank officials opt for a softer adjustment, signaling that scope for easing has diminished but maintaining that some amount of cutting remains likely this year. That much seems to be priced in already, and stopping there may be a relief for traders.

Futures-Implied 2024 Fed Outlook vs. S&P 500 Apri 30
Source: CME

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.

Trade with a better broker, open a tastytrade account today. tastylive, Inc. and tastytrade, Inc. are separate but affiliated companies.

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Related Posts

tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer.  Options, futures, and futures options are not suitable for all investors.  Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on tastytrade.com/disclosures.

tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.

tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.

tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.

© copyright 2013 - 2024 tastylive, Inc. All Rights Reserved.  Applicable portions of the Terms of Use on tastylive.com apply.  Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastylive’s podcasts as necessary to view for personal use. tastylive was previously known as tastytrade, Inc. tastylive is a trademark/servicemark owned by tastylive, Inc.