Mid-Week Update

May 1, 2024 - Pre-FOMC

FOMC Thoughts

Markets have adjusted quite remarkably ahead of today’s FOMC showdown. We now only have just a bit more than one rate cut priced for the remainder of this year. The trajectory of recent data continued with yesterday’s employment cost index, which raised eyebrows and the question of whether second-round wage-inflation effects are already in play.

Source: Bloomberg

Unsurprisingly, speculation of a hawkish pivot at today’s meeting has dramatically increased. Jay will have a hard time trying to swat away any questions relating to the recent trend higher in inflation and will, at the minimum, just refer to the fact that rate cuts will have to be deferred into the second half of this year. I think it is reasonable to expect him just drumming down this line, which, given the re-pricing, could act as a bit of a relief for markets.

The hawkish flipside to this would be an acknowledgement that the possibility of rate cuts has been closed and that removing the easing bias would warrant a more neutral policy stance. While that would be the correct policy, it is likely to be premature, given that the June SEP projection updates would lend themselves as a better communication tool to announce such a shift.

So, in short, expect him to kick the details into the next FOMC meeting and give us plenty of excuses as to why we should be patient and that they still expect inflation to cool in the months ahead.

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Thoughts by Macro D

I have always thought that before entering a trade (in the study phase of a trade), my desk must be full of charts, thoughts, and ideas, but a moment before entering the trade, the desk must be cleaned. There must be nothing. It's like sculpting stone; in the end, only the work you want to give life to must remain.

Who is my privileged interlocutor? It's the Market.

And who is the market? The market is an unstoppable advance mechanism of information that causes the major movement of prices primarily driven by macro data reflecting the underlying economy.

The rest of the movement (the secondary movement) is nothing more than background noise within an oscillation band.

As macro traders, we try to capture these occasional movements. We do so with the awareness that living as risk-takers presupposes the ability to become confident in a future price, not in the current price.

In global macro, the decisive variables are the economic conditions and how central banks (primarily the Fed) respond to each. Today’s Fed meeting, granting all expectations already built, will be no different.

What do I do to become familiar with these variables?

I do what those who don't know where the Holy Grail is hidden do.

I read, write, take notes, listen, read between the lines, imagine scenarios, read what consensus expects, and analyze data.

And here, I have just touched the sore point. THE DATA.

But how can you not feel confused today in a market that presents a certain data type?

Well yes. There are times when I feel very confused.

What touched the stars yesterday flies close to the ground today, and consequently, the macro data that yesterday encouraged me to follow a certain horizon looks at me with a grumpy expression and shouts: Go the other way!

If the same macro data that should outline the long-term perspective behave like loose cannons, which invariable variable should we, who spend our days on the macro planet, rely on?

Let's get into the merits of the issue.

A few days ago, the GDP, which was flying in the highest skies until recently, was severely affected.

What did I think before the release of these data?

Aware that ups and downs are now the order of the day, I imagined that a new surprise was about to reveal itself, but at the same time, like the inveterate bookworm that I am, I was sitting at my desk with all the data and graphs that I could scrape together. One above all caught my attention.

The Atlanta FED was expecting a good 2.9%.

Source: Atlanta Fed

We all know how that ended. What came out was a phantasmagorical 1.6%.

Source: Federal Reserve

And the core PCE? This date suffered the same fate.

Source: Federal Reserve

What does it mean?

We all know that the markets (and all its data) are not predictable, but how can you confuse the sound of a Ferrari's engine with that of a Panda's engine?

Everyone gets into trouble. Unfortunately, the blunder made with the GDP is not the only one, considering what happened in the previous weeks with the job data. According to BLS, millions of jobs have been lost from one moment to the next (from one data release to the next).

Now, the number of layoffs seems ready to take off, yet until recently, it seemed that the job market was a party dress.

Source: MacroEdge

But it doesn't end here. Consumption seems to be much lower than we believed until recently.

Well, if we can no longer navigate this forest of monthly data, what do we have left?

We may react childishly and behave like that child who joins his friends at the sports field and says:

“Since the ball is mine, I make the teams (and the genius of the situation takes the best ones with him). If you don't do as I say, then I'll leave, and nobody will play.”

If we behave like that child and act childishly, too, then we will have to stop studying the charts and settle for looking at the annual data, but I have no faith in this kind of reaction. I will continue to surround myself with graphs, even the ones that now give me headaches.

Why?

If you believe in a macro vision, you have to give everything a chance to everyone, even those who continue to confuse you.

In this specific case, giving everyone a chance also means considering the scenarios outlined by data that can jump from topic to topic with surprising punctuality.

After all, is there anyone who really thought that living immersed in the global macro world is comparable to a walk in the park?

Don’t be fooled.

Let’s now look at what the models tell us as we head into the FOMC.