The past week ended up to be largely a supportive week for risk assets, with a FOMC did their best to avoid a ‘hawkish pivot’, and double downed on their view that rate cuts will still happen once the dis-inflation progress has resumed. Furthermore, Powell made certain to suggest that either softening inflation or a softening labour market would be enough to compel the Fed to cut, and reiterated that policy rates are already sufficiently restrictive, thereby requiring no hikes anytime soon. His Q&A responses were quite direct on these points:

We’ve said that we do not think it would be appropriate to dial back our restrictive policy stance until we gain greater confidence that inflation is moving down sustainably to 2%. So for example let me take a path: If we did have a path where inflation proves more persistent than expected and where the labor market remains strong but inflation is moving sideways and we are not gaining greater confidence, well that would be a case in which it could be appropriate to hold off on rate cuts. I think there’s also other paths that the economy could take which would cause us to want to consider rate cuts. Two of those paths would be that we do gain greater confidence as we said that inflation is moving sustainably down to 2% and another path would be an unexpected weakening in the labor market for example. Those are paths in which you would see us cutting rates. -Chair Powell, May 1st FOMC Press Conference

  • On inflation forecasts: remains confident that slower rent increases will pass into the official CPI and PCE data with a lag
  • On loose financial conditions: dismissed concerns that looser financial conditions were adding to growth over-heating as Q1 real GDP growth did not accelerate; reiterated his belief that conditions are restrictive because rates are higher
  • On labour markets: cited decline in hiring rates, quit rates, and labour market differential as evidence that job markets are slowing coming back into balance.

All in all, Powell did his best to assuage hiking fears, and keeping markets on the look out on ‘when’, not ‘if’ interest rates cuts are going to come. 2yr yields have fallen nearly 15bp since the pre-FOMC highs, while Dec 2024 YE rates are now back below 5% again following the FOMC conference.

Post FOMC, we’ll have NFP today with a slow week next week until CPI mid month. Street estimates are for April payrolls to have another solid showing with unemployment rate steady at 3.8%, though higher frequency data are hinting at a slower labour market that might manifest itself with a weaker NFP print any month now. Furthermore, with the Fed pretty much showing their hand once again on downplaying any hawkish reactions, risk-reward looks to be pretty asymmetrical here into the number, with the market likely to react much stronger to a labour miss than the other way around.

Elsewhere, the US treasury announced coupon sizes that were largely unchanged versus the previous quarter, with the anticipated buyback program to begin at the end of May. Deficit estimates were also in line with prior estimates, with T-bills issuance (as a % of total) remaining close to recent highs.

Risk sentiment has improved palpably after the FOMC, with SPX rising back above 5100 yesterday and yields also seeing a relief rally. USDJPY has also cratered back to 152 after all the earlier panic on the approach towards 160, as the combination of FX intervention and a dovish Fed have managed to squeeze out a lot of off-side longs. However, on a longer term basis, technicals have turned slightly with April looking to be a potential bearish reversal month, though the near term sentiment likely remains supportive in the interim.

In crypto, we saw some levered long liquidation on BTC as prices broke below $60k, on the back of a very disappointing showing in HK ETFs and a massive $564M in US outflows on Wednesday. Was Thursday’s move the beginning of a longer term reversal as mainstream FOMO dies down? Or was that the panic flush to signal a near-term reversal with the Fed sticking to their dovish ways? While we have been cautious on BTC prices over the past 1.5 months, we see more balanced risk-reward at the current levels, and would favor adding to risk should prices flush down to the low $50k area. Good luck!

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