FOMC Fear
Today the US Federal Reserve (Fed) Open Markets Committee meet and this is the meeting where interest rates are set.
After a period of recovery since mid-May, the price action in markets has been extremely volatile since Fridays US Inflation data which showed that against all expectations inflation actually increased last month. The vast majority of market participants had an expectation that inflation had peaked and a series of lower readings were to come.
What happened after this data release:
- Markets priced in the potential for the Fed to raise interest rates by 0.75% today rather than the 0.5% that was priced in. This led to a swift selloff in risk assets.
- Markets priced the Fed Funds rate at 4% in Feb 2023 – it was priced at 3% before this data point – a 1% rise in this pricing in three trading days is virtually unheard of.
Why was there such a big reaction to what is only a month on month data point?
- The market is concerned that central banks have lost control and are unable to control inflation.
- The market is starting to price in a Fed induced recession as the Fed tightens monetary policy too much and actually causes a recession via a ‘policy mistake’.
Some important things to consider:
- We are not in a recession yet and there are no guarantees we will have one.
- The markets are pricing in a lot of bad news and whilst things may get worse before they get better on a long term view there are some very interesting opportunities out there at current levels.
A lot of contrarian indicators to buy are starting to flash on the dashboard:
- Consumer confidence is at an all-time low due to its link with gasoline prices (which are high).
- Investors have not been this pessimistic since 1990!
- Fund manager cash levels are high.
- CEOs have not been this pessimistic since March 2020 (peak COVID).
The above factors mean that it would not take a lot of good news; in fact maybe even some less bad news to spark a risk asset rally.
It is always darkest before the dawn and it feels pretty dark out there right now. It is impossible to predict the short term vagaries of markets but investors with a long term time horizon will be running the slide rule over a number of interesting opportunities at the moment.
All eyes to the Fed interest rate announcement tonight @7pm and potentially more importantly the press conference.
Opinions constitute our judgement as of this date and are subject to change without warning.