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Trader Insights – a tolerant Fed is a green light to the bulls

Chris Weston
Head of Research
20 Mar 2024
We move past the FOMC meeting and marquee landmine for the week, and the broad collective heard what it wanted to hear - the Fed are tolerant of inflation and despite two hotter CPI prints, not much has changed in their thinking.

The wash-up and our central guide has been moves in rates and bonds, where US rates adds an extra 10bp of cuts by December (now pricing 83bp of cuts cumulative) and the June FOMC meeting sees a 25bp cut priced at an 84% probability.

We see the US 2-year Treasury -8bp on the day change, with the yield curve flattening out and US 5YR real rates -10bp. Positioning would have played a part here, and those betting on a change in the median Fed dot (to 2 cuts) had to rapidly rethink that position. The net flow across markets tells how most saw the Fed meeting, and relief in risk assets is there to see. 

Much consideration has been placed on the Fed’s projections for the Fed funds rate (I.e. the ‘dots’), as well as its economic projections. The change to forecast 2024 GDP at 2.1% (from 1.4%) was a shock, as 1.8% was seen as the upper end of economists’ expectations. A tweak to guide 2024 core PCE to 2.6% was a touch above consensus, but the fact the median dot for 2024 still holds in (just) at 3 cuts is what markets have largely focused on. 

In an almost binary world, the market simply wanted to see the wash-up of whether the median estimate from the Fed voters moved to 2 cuts for 2024 or remained at 3.

Taking a bigger picture overview of Chair Powell’s presser, his view that the strong labour market may not get in the way of rate cuts was a big tick to the risk bulls. 

It also seems that the central view from the Fed is that they will look through the recent bout of sticky inflation, with confidence that a trend lower over time is just enough to get the risk party pumping once more. 

Something in there for the hawks/bears

It's not to say that the monetary hawks or financial markets bears didn’t have news flow to work with – the average of the Fed estimates for rates in 2024 moved up 10bp to 4.8%, and we saw one rate cut being removed from their 2025 and 2026 estimates. The longer-run dot (considered to be a neutral setting) was lifted to 2.6% (from 2.5%).

Net net, the market heard a Fed that wants to ease…perhaps the data isn’t quite there yet, but they are in position, and they want to be able to do so, perhaps by June. That call will likely be influenced by the March NFP (5 April), US CPI (10 April) and PPI (11 April).

The move in rates/bonds was the guide for broad markets – the USD sold off universally, with some upbeat buying in the BRL, ZAR, NOK, and AUD. Gold has added $30 (since the Fed statement) and held on for a new all-time closing high, with longs eyeing a re-test of $2195. Crypto has regained some of its lost form, and we see renewed interest to engage with longs, although more work needs to take place to get this pumping as a momentum move. 

The equity bull move gets new life, with new highs in our EU equity index suite, and new ATHs also in the US30 and US500. Participation was good, with 75% of stocks (in the S&P500) higher on the day, led by consumer discretionary, services and financial. Cash volumes were in line with the 30-day average. 

Small caps outperformed, with the US2000 closing +1.9% and looking to push into 2100, with regional banks at the heart of the move. 

Granted, the market has a habit of seeing things differently the day after the Fed meeting, and price action needs monitoring, but for now, the bulls are feeling relief – this should spill over into Asia where the JPN225 breaks to new highs, and we see constructive opens for the HK50 and AUS200. 

We remain on the central bank vibe though, with the Swiss, Norwegian and Mexican central banks all out with policy meetings, with Banxico likely to cut by 25bp, while a 25bp cut from the SNB is lineballs. 

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