Stocks Are at Risk if Fed Chair Powell and U.S. PCE Data Can't Revive Risk Appetite

The markets may wave of liquidation after Easter if Powell’s comments and PCE inflation data fail to revive risk appetite

• Stocks are struggling to follow through on a dovish lead from the Federal Reserve.
• With market-based and official interest rate cut bets aligned, the speculative drive has fizzled.
• U.S. PCE data and Fed Chair Powell comments are arriving amid Good Friday market closures.

Wall Street seems to have run out of ideas since the Federal Reserve issued its latest monetary policy update a week ago.

The bellwether S&P 500 has barely moved since the central bank cheered investors by signaling it still anticipates cutting interest rates three times in 2024. That left unchanged its projection from December despite upgraded economic growth and inflation forecasts. The index is up just 0.3% in the days after the announcement.

Reading the tea leaves across markets produces a similarly suspect picture. The tech-tilted Nasdaq 100—which houses a critical mass of the leaders powering the stock market rally since November—is down 0.3%. The U.S. dollar is up close to 1% against an average of major currencies. Gold is near standstill, up less than 0.2%.

Treasury yields are also behaving strangely. They’re down across the curve, but longer-duration rates have traded significantly more heavily than the front end in the days after the Fed conclave. The 10-year yield is down 2%, while its two-year counterpart is off just 0.7%.

Fed rate cut expectations: nothing left to say?

All this seems inconsistent with a dovish repricing of near-term policy bets. That might have been expected to punish the greenback, drive up gold and encourage the long end of the yield curve to outperform against shorter-term rates. Stocks might have followed through to the upside, with the credit-sensitive Nasdaq in the lead once more.

Instead, it seems the Fed has drained the markets of the impetus for speculation. With no changes to the rates outlook following on from upgrades of growth and inflation forecasts, the central bank has apparently signaled less sensitivity to near-term data outcomes than previously thought.

Current market pricing is already aligned with policymakers’ prognostications. Fed Funds futures are showing 70 basis points (bps) in rate cuts for 2024. This means traders have fully priced in two 25bps reductions and assigned a commanding 80% probability to a third.

Markets trapped as U.S. inflation data, Powell comments loom

From here, the spotlight turns to the personal consumption expenditure (PCE) gauge of U.S. inflation, the Fed’s favored price growth yardstick. The data is expected to show the headline growth rate inched higher from 2.4% to 2.5% year-on-year in February. The core measure, excluding volatile energy and food prices, is seen holding steady at 2.8%.

A mere three hours later, Fed Chair Jerome Powell is scheduled to speak at a conference held by the U.S. central bank’s San Francisco branch.

These would be potent market-moving event risks under most circumstances. This time, the shuttering of U.S. exchanges for the Good Friday holiday will leave most investors trapped in their positions and powerless to react. While Wall Street will return on Monday, most global markets will remain offline, making for thin participation until Tuesday.

Absent an improbably wild downside surprise in PCE statistics or an uncharacteristically dovish turn from Powell, the markets are unlikely to find anything in Friday’s news-flow to dislodge the alignment between their interest rate cut outlook and that of the Fed.

With all the scope for cheaper credit in the future thus priced in, risk appetite might fizzle. Delaying this reaction through the long weekend might make for a quick dash to the exits once liquidity returns, translating into sharply volatile swings across the major asset classes.

Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak 

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