The Macro Brief: Put Skew Pops as Dealer Gamma Turns Positive on FOMC
Where Macro Meet Markets
Following the second consecutive 75 bps rate hike by the Federal Reserve, risk assets absolutely rip as traders look for any clues for a Fed pivot.
In “Ghosts of 2018 Haunt With QT Looming,” I go over key indicators that I follow that signal a Fed pause (before the pivot), and they’re lining up - including my leading indicator that has currently picked out the bottom in long bonds ($TLT), mortgage-backed securities ($VMBS) and other rate sensitive securities.
I also outline the difference in quantitative easing (QE) and tightening (QT), which the Fed is currently undergoing the latter.
What did the market hear from Fed Chair Jay Powell - exactly what they wanted to in order to fit their narrative.
Powell finally acknowledged that the economic landscape is softening but leaned hard into “robust” labor market data (some of the most lagging data sets around).
He then continued stating that the front-ended rate hikes are now in-line with what the Fed sees as the neutral rate (225-250 bps v. my expectations of 200-225 bps), thus, in the Fed's eyes, they are no longer contributing to a “hot” economy vis-a-vis the funds rate.
Powell is trying to thread the needle between tightening financial conditions enough to slow aggregate demand in hopes of lowering core consumer prices and not causing a financial crisis.
During the FOMC presser, he made it clear that the Fed is “data dependent” and further rate hikes may be warranted, but the Fed will likely pause hiking rates on working data.
The markets see this as dovish if not a nod-and-a-wink of a pause. The 30-day Fed funds futures market took this as dovish.
A move higher in the fund futures contract signals expectations of looser monetary policy, but they are still dramatically lower year-to-date.
However, the market is missing a very, very important caveat which will likely come to bite them in the ass.
In the Macro Strategist Pro continuation of this piece, I go over what the market is missing and how the ramp higher in equity prices is structural and what it can mean near-term.
The Macro Brief: $148B In SPX Gamma Set to Expire As Markets Discount Rate Hikes.
The Macro Brief: 7 Volatility Charts As HereMarket Remains Unhedged.
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