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6 Bullet Points Explain Why You Should Be Wary On Wednesday

On Monday in “These Charts Do Not Scream ‘Ready For A Super Aggressive Fed’“, we warned that a fairly rapid repricing higher of yields is being met with price action that suggests markets aren’t prepared to digest an overly hawkish message.

Commodities are in free fall, HY spreads are widening, IG is selling off now too, and the stock-bond return correlation is becoming less negative, triggering an unwind in risk parity.

Correlations

(Goldman)

The takeaway: while a March hike might be seen as confirmatory evidence of the reflation meme’s viability, any indication that the Fed is set to materially alter the expected trajectory of future normalization may be met with tantrum-like behavior.

On Tuesday, Goldman is out with a new note underscoring this point. Below, find a set of bullet points that you should consider and internalize heading into the Fed. As you read them, remember what we said yesterday: “…they need to be really, really careful about what they telegraph on Wednesday.”

Via Goldman 

  • Our expectations for tomorrow’s Fed hike are more hawkish than consensus and the market…
  •  … and we see little risk of a dovish surprise.
  • We think the market is over-estimating the Fed’s ability to remain cautious
  • given the need to ‘lean into the wind’ of rising inflation, strong growth, robust sentiment, easy financial conditions, and the likelihood of fiscal stimulus in 2018.
  • Markets may yet again do some of the Fed’s ‘dirty work’ if financial conditions continue to tighten.
  • However, it seems likely the Fed will err on the side of more rather than less hawkishness.
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