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A hawkish Fed but the market expected more


16 December 2021 Written by Chris Weston  Pepperstone Head of Research Chris Weston

The dust has now settled on the FOMC meeting and participants have had the chance to assess the dots and the economic projections of Powell’s statement. The question I ask is if you knew the full outcome in advance could you have genuinely made money from it? I'm not convinced I would have. Yesterday traders were assessing the possibility of a June rate hike (from the Fed) and we’re now debating whether the Fed start hiking in March, a fate the market puts a 50% probability on – if the S&P 500 and NAS100 don’t drawdown significantly and the wage and inflation data rolls in hot then the March meeting is live.

Three hikes pencilled for 2022 (in the dots) from the Fed was not expected and they justify this by a 2.7% call on core PCE. Jay Powell was certainly upbeat and perhaps the market was inspired by his views - they seem to have created a solid bid in risk assets with the NAS100 +2.4%, while we saw a broad sell-off in the USD, a monster reversal lower in US real rates and XAUUSD into 1784

Again, if you’d told me the outcome, I’d probably have taken the other side of these moves. The question is whether that positive flow continues in the session ahead – recall, we have the ECB, Norges and BoE meeting in our sights today. However, to me, those are largely idiosyncratic events and confined to select markets. The Fed are the markets price maker and affect everything.

So, with calmer heads and a renewed mindset, I question if today could herald a different vision on the Fed decision. The market has had time to digest everything we’ve heard and it would really not be surprising to see a reversal of this positivity – again, it pays to have an open mind and follow the flow. I’d be certainly looking at the USD, 2 and 5-year Treasuries and Apple – they may be some of the core instruments to focus on in the near term.

We also have options expiry on Friday and this may see the S&P 500 shackled to the 4700 area, but things will be free to move around next week and that could mean greater volatility in equities that may spill over into other markets. If the data continues to roll in hot can the markets absorb an end to the QE program let alone a rate hiking cycle?

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