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Andreas Zanin
Analysis | March 17, 2021

FED meeting: 4 charts to consider

We have the Fed today and the markets are expecting a dovish Fed and for stock markets and commodities to remain firm but can they be as dovish as the market expects? We dont think so and for anyone trading the meeting our views below and 4 charts to consider into the meeting…

“The Cboe Volatility Index, known as Wall Street’s “fear gauge,” slipped to a fresh COVID-19 pandemic low on Tuesday, as U.S. stocks soared to new highs on expectations that fiscal stimulus and signs of progress in a countrywide vaccination drive will spur a broader economic rebound.” (Reuters)

US Indexes did not soar they moved higher in low volatility and fell back from the highs – There is no big fear in stock markets at present despite rising inflation and rising bond yields – most investors are looking for a dovish Fed tomorrow but…“A resurgent economy, percolating inflation and a stock market ripping higher don’t seem to make much of a recipe for easy monetary policy. But that’s the position in which the Federal Reserve finds itself.” (CNBC)

The Fed have major problem bond yields rising which are going up in response to the economic reality noted above and the big question is when do the Fed see rates going up? “The key for bond investors is the trajectory officials pencil in for their policy rate over the coming few years. In December, they projected holding rates near zero through the end of 2023.” (Bloomberg)

If the Fed see the economic picture clearly the first-rate hike should come at the end of 2022 – the Fed wont be more dovish than the last meeting in our – watch the Fed members views closely on the dot plot.  Inflation is clearly on the rise and bond yields have firmed to reflect higher long term borrowing costs – Bond prices look set to rise further and this will, of course, help the USD. The Fed is however concerned about a rise in yields and below are the views of RABOBANK:

“Even if the rise in yields in itself would not be a problem to the economic recovery, it could cause cascade effects that would warrant intervention by the central bank. If pushing back verbally against market pressures does not suffice the next step for the Fed could be an adjustment to the asset purchase program. If the reflation trade really gets out of hand, the FOMC may be forced to revisit the option of yield curve control.” (RB) We don’t think they will go down this road yet – it’s a dangerous one with inflation expectations so high.

Inflation Expectations Record High

The Fed need to deal with this and if they say its temporary  as they have said in the past will the market believe them?

Bond Yields US V Other Nations

The market consensus is bearish of the USD which is has been all year but the DXY has shown strength and the reason is bond yields which show the attracitve yield on US bonds V other nations  If bonds firm further after the Fed the USD will gain traction to the upside.

Bonds V The Nasdaq

The chart below shows the NASDAQ V Bond Yields inverted – no fear in the stock market and the gap is now wide could it close?  It’s a big bull market but weakness after the Fed today could well follow through to the downside.

Commodities

Traders have never been more bullish commodities – Latest BofA FMS shows investors are holding their highest allocations ever. Last time people were around these levels of optimism when it comes to commodities, brent was over $100 but the global economy is worse shape than now than back then The strong global recovery story is priced in and if the USD were to rise commodities will get hit hard – We see both Copper and Crude Oil as vulnerable to corrections.

 

In Conclusion…..

This is the most important Fed meeting in over a year in our view and their task is huge – How to  keep the market calm in the face of rising inflation which will accelerate going forward and stop bond yields from spiking further – Its a hard task. We will see if they can do it but we would not be as relaxed as the market coming into the meeting about markets remaining firmly “risk on” – we shall see it shold be an interesting and volatile day.

 

 

Research provided by LearnCurrencyTradingOnline.com

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