The Fed out-doved the market - don't fight the Fed
In my post earlier today I highlighted that the market was going into the Fed with overly hawkish expectations, and that if those hawkish expectations were not met, the market reaction would be heavily skewed towards lower yields. Today the Fed dots signaled 75 bp of cuts in 2024 - more than market expectations - and Powell provided little pushback to the current market pricing of deep cuts. The yield curve bull steepened and USD sold off sharply, and it feels like today was a watershed moment in the monetary policy cycle. Perhaps we will look back on today in a similar way we look back on the “Powell pivot” in January 2019 as a bullish turning point in the cycle.
My first reaction was to go short usd/jpy the moment the headlines showed a projection of 75 bp of cuts in 2024. I was able to get a great fill because I had my finger on the sell button to follow the plan I laid out in the paid subscriber section of my previous post. Yields and USD continued their selloff as Powell focused a lot of his press conference on celebrating the progress that has been made towards getting inflation down. He predicted that the supply side of disinflation has a ways to run and that easing must begin well before reaching 2% inflation. This was music to my ears as most of my portfolio is positioned for a disinflationary trend.
The portfolio of right tail hedges is doing well, with KRE calls being the biggest winner so far. Regional banks need the yield curve to bull steepen, and we finally got that today. The chart looks like it’s bottoming and filling the runaway gaps from March of this year.
Today’s FOMC made it clear that the Fed is now in easing mode. Don’t fight the Fed - go with them.
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