Macro Week Ahead: Are Stocks Ready for What the Fed Does Next?
Macro Week Ahead: Are Stocks Ready for What the Fed Does Next?
By:Ilya Spivak
Will the Federal Reserve finally give the markets what they want?
- Stocks came alive last week as gold and the US dollar eyed a dovish Fed
- Traders will likely focus on what the central bank sees beyond this month
- BOC, BOE and BOJ rate decisions and US retail sales data are also due
Risk appetite returned to US stock markets last week. The bellwether S&P 500 rose 1.5% while the tech-tilted Nasdaq 100 added 1.8%, with both indices posting the largest gain in five weeks. Gold prices continued to climb, adding 0.9%, while the US dollar weakened. It lost 0.5% against an average of its major currency counterparts.
Taken together, this seems to suggest that hopes for a dovish policy turn at the Federal Reserve are behind the markets’ rosy disposition. Tellingly, the rise on Wall Street followed the release of US consumer price index (CPI) inflation data traders greeted as good enough to allow the central bank to commence interest rate cuts.
Bond markets diverge as stocks, gold, and the dollar bet on a dovish Fed
Treasury bonds curiously departed from this broader narrative. The benchmark 10-year rate remained broadly steady while borrowing costs rose at the front end of the yield curve, with the two-year rising 1.5%. Perhaps this spoke to the sense that traders have already priced in what the Federal Open Market Committee (FOMC) will do.
Fed Funds interest rate futures show that the probability of a cut this week has held at 100% over the past week. However, the probability of a standard 25-basis-point (bps) reduction has grown likelier, from 89.4% to 95.9%. The chance of an outsized 50bps cut has declined from 10.6% to 4.1%.
Nevertheless, a wide disconnect between the markets and Fed officials about what will happen after this month continues to create fodder for speculation. The central bank last projected only one 25bps cut next year, while the markets have already positioned for three of them.
What can move the markets if a Fed rate cut is already priced in?
This probably makes September’s quarterly update of the FOMC’s Summary of Economic Projections (SEP) a more potent catalyst for price action than the rate cut itself. If officials take no action to bring their forecasts closer in line with the market consensus, stocks may take a disappointed turn lower while the US dollar mounts a comeback.
Leading into the policy announcement, US retail sales data is expected to show that receipts growth slowed in August with a monthly rise of 0.3%. That would amount to the smallest rise in three months. Last week, a survey of consumer confidence from the University of Michigan (UofM) put sentiment at a four-month low.
Policy updates are also due from three other major central banks. The Bank of Canada (BOC) is expected to resume its easing cycle after a six-month pause and cut the target rate to 2.50%, the lowest since mid-2022. No changes are on the menu this month from the Bank of England (BOE) or the Bank of Japan (BOJ).
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
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