Federal Reserve
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Stocks May Struggle as Bonds Rebound After a Fed Policy Update

By:Ilya Spivak

Interest rate futures price in the probability of an on-hold outcome at a commanding 99%

  • All eyes are on the Federal Reserve as the central bank updates official forecasts.
  • A hawkish repricing of rate cut expectations has already played out in the markets.
  • Bonds may try to recover, but Wall Street may struggle after the Fed’s dust settles.

Financial markets are now wholly focused on a monetary policy announcement from the U.S. Federal Reserve.

No change in the target fed funds rate is in the cards. Interest rate futures price in the probability of an on-hold outcome at a commanding 99%. This puts the spotlight on updated economic and policy forecasts from the steering Federal Open Market Committee (FOMC) as well as the post-meeting press conference with Fed Chair Jerome Powell.

Officials penciled in 80 basis points (bps) in rate cuts in their December forecast update. Since then, a steady stream of hotter-than-expected economic data, including various measures of inflation, has trimmed the markets’ expectations from about 150bps in stimulus to just 62bps, meaning the likelihood of a third cut by year-end is now a 50/50 toss-up.

Fed vs. markets on 2024 rates outlook: two cuts instead of three?

Not surprisingly, that has put the breaks on a blistering Wall Street rally. Stock markets buoyed by hopes for cheaper money than the central bank was willing to acknowledge since the beginning of the year are now struggling to make headway as traders’ policy outlook flirts with a more hawkish setting than the central bank’s baseline.

U.S. fed funds futures-implied rates
Source: CME

The Fed lowered its projections for 2024 gross domestic product (GDP) growth and inflation in December. That distilled down into the call for 80bps in rate cuts, up from the 50bps that policy envisioned in September. Economic activity and prices have surprised to the upside since, implying revisions in the opposite direction are in view.

Stocks and bonds may diverge after FOMC decision, Powell presser

Upgraded projections for this year might come at the expense of lowered views for 2025, suggesting the central bank is shifting out the timeline instead of reducing scope for expected stimulus. The markets might find a way to see this as supportive for risk appetite, given the hawkish repricing that has already occurred.

If such a dispensation is not forthcoming, the markets will be left to hope that Powell will offer soothing relief with a dovish rhetorical overlay to an otherwise worrying revision in the policy path when he sits for a presser after the announcement. He attempted as much when he testified in Congress earlier this month.

On balance, bond markets may attempt a rebound if it appears the Fed has not offered investors much more of a hawkish lead to reprice expectations beyond what has already played out since the beginning of the year. Stocks may not be so lucky: Marking the end of the narrative underpinning a five-month rally may encourage profit-taking.

Futures-implied 2024 fed outlook vs. S&P 500
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.

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