Stocks churn before Fed with Powell as ‘wild card’: Markets wrap

Wall Street traders refrained from making any big bets ahead of the Federal Reserve decision as they waited to see whether Jerome Powell will throw cold water on interest-rate hopes.

Equity futures fluctuated after the S&P 500 hit at another all-time high. Bonds were little changed Wednesday, having saddled investors with losses this year as expectations faded that the Fed would ease policy sharply.

Investors will be focused on Fed officials’ forecasts for interest rates — the “dot plot” — which will show how much the committee expects to ease in 2024 and 2025. The central bank is also scheduled to hold a discussion on its $7.5 trillion balance sheet, which it’s been shrinking by allowing some securities to mature without replacing them — a process known as quantitative tightening.

What will Powell say?

Win Thin and Elias Haddad at Brown Brothers Harriman:

Will he reprise the hawkish tone of his January press conference? Or will he repeat his more dovish testimony before Congress earlier this month? We expect the former, but there are significant risks of the latter.

Growth and inflation forecasts are likely to be raised, reflecting the current macro backdrop of sticky inflation and a resilient economy and labor market. However, it’s the “dot plot” that will command the most attention — and we see risks of a hawkish shift.

Ian Lyngen and Vail Hartman at BMO Capital Markets:

Investors will be particularly attuned for anything from Powell that indicates he has shifted his read on the trajectory of inflation since his ‘not far’ Congressional testimony.

Adding to the wild card nature of this afternoon is any potential balance-sheet discussion or hints on QT.

50 bp versus 75 bp of cuts remains the great debate — but keep in mind 2025 and 2026 will be impacted by a minimum of any change made to 2024.

An increase in the long-run dot would have a curve-wide bearish impact on the Treasury market.

Nicholas Colas at DataTrek Research:

Markets are still sticking to the idea that June will see the first rate cut and that the Fed will deliver on its December 2023 projection of three rate reductions this year.

If the committee does choose to “take back” a rate cut, markets might take that poorly. This decision would mean that the Fed sees inflation as stickier than it thought just three months ago. Investors would reasonably ask “what do they know that they are not sharing?”

Tom Essaye at the Sevens Report:

If the Fed is hawkish and signals a higher-for-longer policy stance (more so than is already priced in), expect some volatility in the wake of the decision while a dovish decision projecting confidence in a soft landing could see the 2024 rally extend to new highs.

Key events this week:

• Eurozone S&P Global Services PMI, S&P Global Manufacturing PMI, Thursday
• Bank of England rate decision, Thursday
• US Conference Board leading index, existing home sales, initial jobless claims, Thursday
• Nike, FedEx earnings, Thursday
• Japan CPI, Friday
• Germany IFO business climate, Friday
• Atlanta Fed President Raphael Bostic speaks, Friday
• ECB’s Robert Holzmann and Philip Lane speak, Friday