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This evening, Wednesday 1st May, we will hear from Jerome Powell and the FOMC with an update about US interest rates. This is a big one.
The market’s predictions on interest rates have been consistently moving in the wrong direction in recent months. In Q4 of 2023, it was looking for around 1.25% of cuts during 2024. That is now closer to one cut of 0.25% and even that might be taken off the table after this evening’s meeting.
The Fed is concerned about a resurgence in inflation. This is understandable, recent data has not been good.
However, we would expect the rhetoric to remain the same as the Fed will not make any decisions based on a few months' information. Rates will remain higher for longer, and the committee will continue to monitor the data. Anything else could send the markets into a bit of a spin.
The S&P 500 fell 4.2% in April in its worst monthly showing since September and the market is now bracing for the next round.
Contrary to the major drop in US equities, the FTSE 100 in the UK is going through something of a resurgence. It’s hard to get too excited as the index has lagged behind it’s peers for so long.
This asset allocation may be seen as investing in relatively defensive stocks which is what the UK market is famous for. If you’re looking for value, it has been in that camp for some time now and we have often beaten that drum but to no avail.
The market often needs a few big buyers to build momentum and that’s exactly what we’ve seen.
On Tuesday US and European stocks fell and the dollar edged higher and this move has continued today during a holiday-thinned session in Europe and Asia. European markets are closed today for the May 1st Bank Holiday.
Contracts on the S&P 500 pointed to further losses on Wall Street after US data on Tuesday reinforced bets officials will keep rates steady at a two-decade high. Europe’s Stoxx 600 dipped 0.1%. A dollar gauge climbed, while 10-year Treasury yields were little changed at 4.68%.
The last time Fed Chair Jerome Powell spoke, he pointed to the lack of progress in bringing inflation down. The most recent signals on prices and the economy, along with expectations fora robust employment report on Friday, are unlikely to prompt a change of tune.
“We are unlikely to hear anything dovish from the Fed today,” said Lilian Chovin, head of asset allocation at Coutts. “The higher-for-longer narrative is not easy for markets to navigate.”
Traders are bracing for big moves in stock markets and bonds are turning more bearish ahead of what many expect will be a hawkish tilt by the Fed. After positioning at the start of the yearfor multiple reductions in 2024, investors are now pricing in just one full quarter-point cut.
The futures and options markets are used by hedge funds and platforms such as TPP to hedge their open positions in the market. Current bets suggest that the options market is more concerned about a potentially big move in the S&P 500 Index this evening than it has been at any point in almost a year.
The benchmark index implies a move of around 0.95% on Wednesday, when the Fed gives its view on rates and Chair Jerome Powell holds his post-meeting press conference. The last time traders priced in an FOMC-day move this big was in May 2023, data compiled by Citigroup shows.
“If the Fed asserts a high probability of no cuts this year, or even the open possibility of another hike, that could deepen the selloff in stocks,” said Kyle Rodda, a senior market analyst at Capital.com.
Meanwhile, data for the week leading up to April 23 showed hedge funds also building short positions in bond futures. Commodity trading advisors, or CTAs, are now sitting at near “max short duration,” according to Bank of America strategists.
Geopolitical tensions seem to have calmed a little over the week leading to Oils extended declines, with Brent falling around 1% for a third day and trading near $85 a barrel.
Benchmark Brent crude fell below $85 a barrel for the first time since the middle of March, while West Texas Intermediate was below $81. US crude stockpiles increased by 4.9 million barrels last week, according to the American Petroleum Institute. It would be the fifth expansion in six weeks if confirmed by official data later Wednesday.
The data added a bearish picture as traders monitor prospects for a cease-fire in the Middle East, which could de-escalate tensions and weigh on oil prices. There were more bearish Brent options traded than bullish ones for the first time since March on Tuesday, an indication that traders are becoming less concerned about geopolitical risks.
This is good news for inflation and another reason why the Fed might just sit in a holding pattern for the time being and not give too much away.
Corporate results this week have been fairly solid so far including Amazon on Tuesday, but none of that will alter what happens this evening. There is no systematic issue within the economy, so many traders may see a big drop as a buying opportunity. On the flip side, a big rally may seem like a selling opportunity as regardless of what Jerome Powell says, rates aren’t likely to go anywhere fast and stocks aren’t cheap.
We shall see, but the one thing the market is betting on, and that’s that the market will move during tonight’s 19.30 (GMT) press conference.
More on what actually happens in our weekend review.
