Pre-FOMC thoughts, precious metals, and BTC

Reasons to position for a hawkish outcome going into the FOMC today:

• The employment number on Friday showed no evidence of a weakening economy

• Super-core inflation is still annualizing well above the Fed’s target

• If the Fed wants to maintain its inflation-fighting credibility, they need to deliver the message that they will keep their hiking bias and keep rates high for longer.

• The market is pricing in 4.5 cuts in 2024, and it’s unlikely that the Fed dots will come anywhere close to that. The street consensus indicates expectations for 50 bp of cuts in 2024.

Reasons to position for a dovish outcome going into the FOMC:

• 9 out of 10 analysts or pundits believe the Fed will be hawkish and will fail to deliver on market expectations of cuts. This idea is already consensus, and it’s dangerous to be positioned with the consensus.

• The idea that the Fed should keep real rates constant or lower by cutting rates as inflation falls is spreading among the policy-making community, and was even highlighted by Janet Yellen in her WSJ interview yesterday.

• Despite concerns of a hawkish Fed today, there is a growing cohort of analysts that believe inflation will exceed expectations to the downside in 2024. The “sticky inflation camp” is losing ground as goods deflation has been stronger than expected, and the only thing sticky has been shelter CPI, which we know can lag by over 12 months. Based on Alpine Macro, if you replace the shelter CPI component of core CPI with real-time rent prices, then core CPI has actually fallen below the Fed’s 2% target!

  

  Source: Alpine Macro

• The 30 yr Treasury auction yesterday showed strong signs of demand, and Treasuries have been holding in despite the market’s concerns going into the FOMC, which suggests that positioning is short.

• Deutsche Bank: “The key thing that jumps out is that, not only have the median dots consistently increased over this cycle, as noted above, they have also consistently surprised to the upside. Specifically, over the past three years, the only instance in which a median dot came in below expectations was March this year, when the survey was conducted in the eye of the banking storm just days after the Fed unveiled a slew of emergency measures; respondents were likely just waiting for that dust to settle.”

I’m personally leaning towards the dovish outcome side, and my portfolio is lightly positioned for a dovish reaction to the FOMC. If the Fed is less hawkish than expected, I think the market will run, while a hawkish outcome could see yields reverse their gains quickly.

In addition to the Fed dots, what will be important is the Fed’s openness to cutting rates. I believe that once the Fed starts cutting rates, they will cut faster and lower than the market expects. The uncertainty in the yield curve right now is centered mostly around the timing of the first cut.

Now, onto precious metals and bitcoin…