Market Rate Cut Expectations Drift as Macro Signals Diverge
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Market Rate Cut Expectations Drift as Macro Signals Diverge
Wednesday will be the FOMC meeting and press conference. It seems like great TV for President Trump to announce his Fed chair that day, ideally at 2:30 PM ET. That would certainly divert the headlines, put the financial media offside, and create maximum confusion.
Whatever the case, the Fed isn’t expected to cut rates at this meeting anyway, so it should be a bit of a snoozefest. What the Fed does between now and May probably doesn’t matter, especially if we get a new chair who starts cutting on day 1.
The market seems to think the path for lower rates isn’t quite as steep as it had been, with the Fed Funds rate by December somewhere around 3.25%, and then that’s it. So the pick is going to have to be someone who leans very dovish to change expectations, because the market knows, just like everyone, that Trump is going to pick a dovish person.
As a result, the potential for the 2-year yield breaking out and moving higher seems real, with resistance at 3.62%. What seems to stand in the way is a 2-year potentially rising back to 4%. It certainly seems possible, and technically speaking, after the 2-year has made multiple bottoms in recent months and the RSI has started to trend higher.
Where the 2-year goes, though, may be tied more to oil. With inflation still running around 3% and oil dropping to around $60 from a high in the $120s, this really emphasises the idea that higher oil prices could easily start driving inflation higher again. Which is probably why the chart of oil and the 2-year look nearly the same.
The BOJ took the “kick the can down the road” path again, opting not to raise rates and, in my view, not providing a clear policy timeline. The only reason the Yen strengthened on Friday was rumors of a “rate check“ by the NY Fed on behalf of the US Treasury. This is basically a signal that an intervention could be on the way. Maybe the plan is to try to hold things together until after the snap election in February. It is not clear to me, but it will be interesting to see how things trade once Japan opens again on Monday.
The KRW also strengthened materially against the dollar on Friday. There has been talk in recent weeks about the Korean won being too weak, so I guess the KRW took the JPY news as putting it on notice.
The KRW probably matters more than most would think, given that South Korean investors have built up a sizeable stake in US equities. It is probably one reason why the KRW has weakened so much. An investor in SK has to sell KRW to buy USD to buy US equities. So, if the KRW starts to strengthen at this point, it could begin to pressure this trade, because the FX exposure leaves unhedged investors exposed to potential USD losses.
Of course, there will be big earnings this week from MSFT, AAPL, TSLA, and META. All four stocks, as far as I can see, are in positive gamma with positive delta positions. Implied volatility generally rises into earnings due to the risk event, so we could be in one of those situations where, unless the reporting company delivers blowout earnings, it may very well be a sell-the-news event, as implied volatility gets crushed after the release and hedges get unwound due to delta decay.
-Mike
Glossary by ChatGPT
Delta – A measure of how much an option’s price is expected to change for a $1 move in the underlying asset.
Delta Decay – The reduction in an option’s sensitivity to price changes as time passes or after a volatility event.
Dovish – Describes a policy stance favoring lower interest rates and accommodative monetary conditions.
Fed Funds Rate – The overnight interest rate at which banks lend reserves to each other in the U.S.
FOMC – The Federal Open Market Committee, the Federal Reserve body responsible for setting monetary policy.
Gamma – A measure of how much an option’s delta changes as the underlying asset price moves.
Implied Volatility – The market’s expectation of future volatility embedded in option prices.
Positive Delta – An options position that benefits from a rise in the underlying asset’s price.
Positive Gamma – An options position that gains from increased volatility in the underlying asset.
RSI (Relative Strength Index) – A momentum indicator used to assess overbought or oversold conditions in an asset.
Sell-the-News Event – A market reaction where assets decline after an anticipated event occurs, despite positive headlines.
Disclosure
This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
Will be interesting to see how oil supply from Venezuela affects prices. Good point re: KRW too - I can see the case for more KRW flowing back into Korea