Focus Turns To FOMC

WHERE WE STAND – It feels like the week hasn’t really got going yet, which I suppose isn’t much of a surprise given the plethora of public holidays we’ve just come through, and ahead of a busy slate of central bank decisions over the next day or so.

With that slate of events in mind, and as fresh catalysts were once again lacking, it was little surprise to see markets give us ‘more of the same’ on Tuesday, as a degree of de-risking and position squaring also took hold.

As such, equities continued to face notable headwinds, with the S&P notching back-to-back daily declines, as the tech sector underperformed. I’m more than happy to stick with my rally selling strategy here for the time being, with the market having seemingly been lulled into a false sense of security by the relative calmness on the tariff front last week, while ignoring continued elevated economic and political uncertainty, and forgetting that there is no ‘Fed put’ to ride to the rescue just yet. It seems ‘no news’ is back to being ‘bad news’ once more.

Plus, hopes of any concrete trade deal progress seem to be dwindling rapidly, especially with Trump having now gone from “90 deals in 90 days” to “don’t ask me how many deals we’ll sign” – not exactly a sign of confidence, there! I certainly won’t be getting too excited over reports that Treasury Sec Bessent will be holding meetings with the Chinese in Switzerland this weekend.

Treasuries also traded a little softer before paring declines, with weakness most notable at the long-end of a steeper curve, as markets digested a huge issuance slate, both in terms of this week’s Treasury supply, and amid a rush among IG issuers to price sales ahead of the FOMC decision later today.

It’s still tough, in my view, to have an especially high conviction call in terms of Treasuries right now, as it remains to be seen which side of the fence bond market participants come down on in terms of the macro impact of tariffs, with downside growth, and upside inflation, risks almost as prevalent as each other. That said, the market still feels overly dovish in terms of Fed policy expectations, with over 80bp of cuts discounted by year-end, which could at least give some room for weakness at the front-end, especially if as expected we get a repeat of the ‘status quo’ from Chair Powell later on.

It's considerably easier to have a higher-conviction view when it comes to the FX space, where I remain a dollar bear, with the greenback having declined against all major peers yesterday, as haven demand continues to flow elsewhere, and as policy incoherence continues to exert stiff downwards pressure. Cable towards 1.35, the EUR to 1.15, and USDJPY back to 140 seem reasonable targets.

That haven demand, unsurprisingly, has again made itself known in gold, with bullion enjoying its salad days once more, having risen north of $3,400/oz yesterday. The bull case for the yellow metal remains a convincing one, with it being the only real haven out there right now, being significantly insulated from all of the various political nonsense taking place elsewhere, and with momentum also now being firmly back in the bulls’ favour.

LOOK AHEAD – All eyes on the FOMC, today, though Powell & Co are near-certain to stand pat, maintaining the target range for the fed funds rate at 4.25% to 4.50%.

While this should, by and large, be a ‘placeholder’ meeting, the updated policy statement is nevertheless likely to flag how economic activity has ‘moderated’ from the ‘solid pace’ seen over the last year or so, while also noting that risks to both sides of the dual mandate, and economic uncertainty, have continued to increase of late.

Chair Powell’s tone at the post-meeting press conference will broadly reiterate his recent remarks, in keeping with the ‘wait and see’ stance that policymakers continue to operate with. In terms of stagflation risks, Powell should repeat that the FOMC’s modus operandi here would be to assess how the dual mandate goals may be conflicting, how far each goal is from being achieved, and the time horizon over which said achievement may take place, before determining the appropriate policy response. Meanwhile, on politics, Powell will respond to the inevitable questions by noting that he won’t resign if asked, that FOMC members are not removable except “for cause”, and that Fed independence is a matter of law.

On the whole, don’t expect the FOMC to ‘rock the boat’ too significantly this evening.

Besides the Fed, there is little else on today’s docket. March eurozone retail sales figures will likely be entirely ignored, while notable corporate earnings today come from the likes of Uber, Disney, and Arm Holdings.