Some insights pinched from Darius Dale insights on real Visions daily briefing today:
Jerome announced rates up by 0.25%, and re-assuring the market that the economy is strong and can tolerate the tightening in their quest to tame inflation. The infamous dot plot guiding for further tightening as follows:
However, the US Fed is guiding for US unemployment to remain virtually unchanged during this tightening phase - It just doesn't add up or make any sense.
Jerome said during the conference that "financial conditions (going forward) will be less supportive of various functions".
It appears, at the moment, inflation is the Feds priority. There is a real risk that they will they not stop tightening until the stock market breaks. Darius is suggesting the US Fed put is at around 3200-3400 for the S & P 500....That is about 30% below current levels.
With options expiry Friday, there is likely to be a strong relief rally as traders unwind and place hedges in the short term.....................A sell the rip opportunity perhaps.
This meeting has the potential to be the most significant US Federal Reserve meeting for some time. Early Thursday morning our time, Jerome Powell will announce the FOMC interest rate decision, and their tightening stance.
Given runaway inflation, sticky wages growth and a tight labour market, there is more than enough data to justify significant tightening. It could easily be argued that Jerome is way too late in pulling away the punch bowl. However, inflation will also be a massive brake on demand, and the Fed may take this into account. It could play out one of 2 ways:
1) Jerome announce the first step in aggressive tightening to tame inflation (by killing demand so it matches the supply constraints). OUTCOME: Long dated bonds may rally, and high beta / small cap / growth stock fall - commodities may also come off the boil. or;
2) Jerome backs off on the tightening - raise by say 25 BP, and guiding for a more moderate tightening. OUTCOME: Long dated bonds may fall, commodities rally, gold may rally, and high beta / small cap / growth stock flat......If this occurs, the US fed will lose all credibility in controlling inflation - one of their key mandates.
I think option 1 is more probable, given their employment mandate is met, and inflation is their sole headache, whilst the broader market, is 'only' off 15% off its all time highs during a geo-political crisis. If option 2 occurs, inflation may be around for years to come........
I think it is too risky to buy ahead of this meeting - particularly small caps, and growth. Be careful out there. A really tricky market for investors.