The Week Ahead
Volume 46 - Fed Flip Flop?
I am sorry it’s late. I have been moving home and am still not nearly done.
Last week was the best week of the year for me, finally closed that long on 10yr from 110’30, I also began to trim a pair trade that I shared in February which was long QQQ vs DIA. That same post I also shared long XTL vs SX7P which hasn’t done badly either.
Lots of chatter about the FOMC meeting this week with most participants uncertain what the decision will be. Many of those participants tend to think too much about what they would do if they were Jay (which tends to be wrong). I will share my two cents. Right now 25bps is the higher probability but I am more on the no hike fence. Not only has this been the most aggressive tightening crusade seen, the Fed usually hikes until something breaks. After all, the path was always to pause and assess. Pausing now would be a strong decision to make by the Fed considering inflation and the jobs market. I am sure if the Fed do end up pausing, Jay will make it clear that they will resume the hiking crusade if inflation gets stickier (he will also assure us that the banking system is stable). Whilst FRAOIS is at an area where the Fed always throws the towel in, some traders are betting on a March cut but to hike in May. 25bps is obviously the most probable outcome (markets are pricing that in), I just am sharing my gut. As it’s a possibility, I may as well write why the Fed would hike 25bps… to start it would make the Fed look serious about inflation/separate inflation fight from financial stability… the end. 25bps does run the risk of more turmoil in the financial system…
The dots will also be released on Wednesday which will be interesting considering what is being priced in right now (Peak 4.8%, cut into December putting rates sub 4%).
This could be one of the most important meetings this cycle. Proceed with caution… not a bad week to be an observer.
Correlation managed to rip many faces off in the past week. I would expect that to continue until the Fed Decision and then correlations should re-assert themselves. From CTAs and quants to FinTwit’s loudest personalities incessantly repeating “it’s all one trade”, markets have humbled many of those in the past fortnight!
(It was never going to be just “all one trade” was it?”
I can’t see why the downwards pressure on treasury yields can’t continue.
Now time for the good bit, stocks…