Wall Street Braces For Big Test Of Dovish Fed Bets: Markets Wrap

(Bloomberg) — Wall Street is gearing up for what’s expected to be the most-important Federal Reserve meeting of the year, with traders awaiting any indications on whether the market’s aggressive dovish bid is now overdone. 

Stocks, bonds and the dollar saw mild moves amid bets the Fed will hold rates Wednesday and try to put a lid on expectations for rate cuts of over 100 basis points in the next 12 months. How the Fed frames its outlook for policy ending next year and 2025 via its “dot plot” could inject some uncertainty into the market that has run well ahead of the central bank’s forecasts.

The Federal Open Market Committee is poised to keep rates in a range of 5.25% to 5.5% — a 22-year high first reached in July. The decision and a statement will be released at 2 p.m. in Washington. Chair Jerome Powell will hold a press conference 30 minutes later. Economists surveyed by Bloomberg expect the median Fed projection will show two rate cuts next year and five more in 2025. 

Just a few hours ahead of the decision, data showed US producer-price gains slowed as energy costs declined. Consumer-price data released Tuesday showed a drop in the annual rate of inflation — even though monthly gains picked up as housing and other service-sector costs rose. Taken together, the data reinforce the notion that inflation is trending back toward the Fed’s 2% target.

The S&P 500 wavered after closing at the highest level since January 2022. Treasury two-year yields dropped below 4.7%. The dollar was little changed.

• Ian Lyngen, head of US rates strategy at BMO Capital Markets:

“We expect the Chair will use this opportunity to 1) reinforce the Committee’s higher-for-longer messaging by reiterating that it would be premature to declare victory on inflation, and 2) maintain a degree of symmetry around the FOMC’s future rate decisions in an effort to dissuade the market from price in near-term rate cuts.”

• John Lynch, chief investment officer at Comerica Wealth Management:

“We believe the markets are priced for near-term disappointment. We struggle to embrace the consensus logic calling for 12% profit growth and more than 100 bps in rate cuts in 2024. Recent data on inflation, employment, and Jerome Powell’s persistent messaging are inconsistent with the market’s optimism.”

“Consequently, it’s likely the Fed will keep its projection of a 5.1% fed funds rate by year-end 2024, leading to higher market interest rates and a potential test of the S&P 500’s 50-DMA around 4,400 — which would represent a drop of approximately 5% from current levels.”

• Richard Flynn, UK managing director at Charles Schwab UK:

“Having failed to recognize the need to tighten policy early in the cycle as inflation soared, the Fed continues to signal a willingness to keep policy tight for an extended period to help make sure inflation falls. The message from the Fed has been that short-term rates will be higher for longer, but without much detail. The market has gotten ahead of the Fed in anticipating rate cuts a few times over the past year only to have to unwind those expectations, causing yields to rebound sharply.”

• Craig Erlam, senior market analyst at Oanda:

“Any acknowledgment of rate cuts next year could be well received, although only one may receive a cool response as that would suggest policymakers view it as coming very late in the year. Traders may well shake on two as that would point to a third-quarter rate cut which seems odd as that still wouldn’t be nearly as aggressively as markets are positioned but it’s unlikely the Fed will pivot to the extent that it aligns with the very optimistic expectation currently priced into the markets. That isn’t to say they won’t get there over the next few months.”

• Will Compernolle, macro strategist at FHN Financial:

“The market will focus on the median end-2024 dot, but the range of estimates will also be important. The question is how much Powell’s press conference and the dot plot push back against market expectations for at least 100bp of monetary easing next year.”

• Tom Essaye, a former Merrill Lynch trader who founded The Sevens Report newsletter:

“The keys are the 2024 dot (does it show 50 bps of cuts?) and whether Powell slams the door on the idea of rate cuts (or leaves it slightly open). Unless he blatantly admonishes the market’s opinion as too optimistic, don’t expect a pullback because Powell reiterating rate cuts are a consideration right now won’t change investor opinions. Essentially, this powerful belief makes the bar for a hawkish disappointment very high and that’s good for the Santa rally.”

• Arthur Hogan, chief market strategist at B. Riley Wealth:

“The Fed is approaching the point at which it will need to adjust its rhetoric to prepare investors, policymakers, and the public for cuts in the policy rate around the middle of next year.”

Even a slight pushback from the Fed on interest-rate cuts could unravel the relentless stock rally since late October.

“We have this cohort modeled to sell S&P 500 in every scenario over the next week,” Goldman Sachs Group Inc. derivatives and flow specialist Cullen Morgan wrote in a note to clients. It follows a warning from his colleagues last week that dangerously high optimism on stocks means there are “no longer any bears left.”

Elsewhere, traders ramped up bets on interest-rate cuts by the Bank of England next year after soft GDP data reinforced the view that policymakers won’t be able to keep monetary policy tight for so long. For the first time in the current cycle, markets fully priced 100 basis points of monetary easing in 2024, which would take borrowing costs to 4.25%.

• Tesla Inc. filed a recall covering more than 2 million vehicles after the top US auto-safety regulator determined its driver-assistance system Autopilot doesn’t do enough to prevent misuse.
• SpaceX will sell insider shares at $97 apiece in a tender offer, a price increase that boosts the value of Elon Musk’s space and satellite company closer to $180 billion, according to people familiar with the matter.
• Pfizer Inc.’s disappointing forecast for next year showed the purchase of a leading cancer drugmaker isn’t enough to fill the ever-growing hole from its flailing Covid franchise.
• Southwest Airlines Co. raised its outlook for fourth-quarter revenue, buoyed by higher travel demand and ticket prices than it had expected over the year-end holidays.
• Coinbase Global Inc. is rolling out spot crypto trading on its international exchange as part of a global expansion, saying some users are wary of US venues due to the country’s uncertain regulatory backdrop.
• Country Garden Holdings Co.’s onshore unit said it repaid in full an 800 million yuan ($111 million) bond with a put option due Wednesday.

• European Central Bank policy meeting followed by news conference with ECB President Christine Lagarde, Thursday
• Bank of England policy meeting, Thursday
• Swiss National Bank policy meeting, Thursday
• US initial jobless claims, retail sales, business inventories, Thursday
• China 1-yr MLF rate and volume, property prices, retail sales, industrial production, jobless rate, Friday
• Eurozone S&P Global Manufacturing PMI, S&P Global Services PMI, Friday
• US industrial production, Empire manufacturing, cross-border investment, Friday

Some of the main moves in markets:

• The S&P 500 was little changed as of 9:31 a.m. New York time
• The Nasdaq 100 rose 0.3%
• The Dow Jones Industrial Average was little changed
• The Stoxx Europe 600 rose 0.2%
• The MSCI World index was little changed

• The Bloomberg Dollar Spot Index was little changed
• The euro was little changed at $1.0796
• The British pound fell 0.2% to $1.2532
• The Japanese yen rose 0.2% to 145.20 per dollar

• Bitcoin rose 0.6% to $41,348.01
• Ether rose 0.6% to $2,184.95

• The yield on 10-year Treasuries declined three basis points to 4.17%
• Germany’s 10-year yield declined four basis points to 2.18%
• Britain’s 10-year yield declined 11 basis points to 3.86%

• West Texas Intermediate crude rose 0.3% to $68.85 a barrel
• Spot gold rose 0.1% to $1,981.83 an ounce

This story was produced with the assistance of Bloomberg Automation.

More stories like this are available on bloomberg.com