It’s up to the data to “speak” now, and speak it would on Thursday and Friday. But the initial reaction to the July FOMC meeting and Jerome Powell’s press conference was indicative of a market ready and willing to trade the end of the Fed’s hiking cycle.

Most notably, the dollar was on the back foot, although it would subsequently reverse course. Prior to the ECB decision and a raft of top-tier data from the US, the greenback was lower for a third session.

As discussed in these pages on too many occasions to count (most recently following the cool June CPI report), a weaker dollar is bullish for pretty much everything else, and that’s both a gift and a curse. A gift in that everyone likes making money, and when the dollar’s on its heels, the world is a much a friendlier place. A curse in that higher asset prices can be conducive to inflation, particularly if greenback weakness feeds commodity strength.

I should emphasize: The figure below illustrates how the dollar was trading headed into Thursday’s key US data and the July ECB meeting. The greenback ultimately surged, helping to undercut stocks already besieged by higher bond yields.

I’m the first to say the Fed can’t fight the FCI battle forever. The path of monetary policy in the US can’t be dictated solely by a phobia of easier financial conditions. The problem wasn’t so much that the dollar was trading the Goldilocks narrative, the likely end of Fed hikes and the read-through of the latter for rate differentials, it’s that any dollar weakness is unfolding against a backdrop where risk assets have already rallied hard, financial conditions have already eased, credit spreads have narrowed significantly and so on.

Everything hangs on the viability of the Goldilocks/soft landing story which continues to gather adherents, or at least in the context of the US economy. And make no mistake: The tails still exist. The market traded the right-tail outcome on Thursday, thanks to another round of hot data (with a kicker from speculation about a possible BoJ YCC tweak).

The left-tail outcome is a so-called “Wile E. Coyote” moment for spending and the labor market that brings back the recession trade. That’d drive down yields, but not necessarily the dollar which, in a worst-case scenario, could rally as investors seek safety. In that situation, a bond rally would presumably be driven by breakevens, pushing up reals and tightening financial conditions.

The right-tail outcome seems more likely. The US economy is resilient as far as anyone knows and if the data continues to suggest consumers are confident and the labor market strong, all it’d take is a couple of wrong-way CPI reports to force a rethink of the assumption that July’s hike was the last of the cycle. I talked at length about that right-tail outcome on Wednesday evening in “Goldilocks Euphoria Masks Lingering Tail Risks”+, and it showed up during Thursday’s cash session in the US.

Following the FOMC meeting, markets priced about a 40% chance of another hike across the September and November meetings.

For the most part (i.e., as far as everyday investors are concerned), market pricing for the rates trajectory wasn’t materially affected by Powell’s remarks.

For now, nobody wants to hear about recession risk or the possibility that a “no landing” will force yet another upward repricing in terminal rate expectations. Everyone’s on vacation, including and especially equity vol, US stocks want new records and Goldilocks is in the macro driver’s seat. But as Thursday’s trade made clear, the risk of a hot economy compelling the Fed to stay in the game remains in play.

Below, find some Fed commentary from across the Street.

Powell said that the FOMC has not made a decision to hike every other meeting and will instead proceed meeting by meeting and look at the totality of the data. We interpreted Powell’s remarks as diplomatic rather than hawkish. We suspect that some more hawkish participants might have felt that he overstepped in June by nodding toward a “careful pace” of tightening, and we think that he mainly intended to avoid prejudging a committee decision. With the Jackson Hole conference a month away, there was no urgency to send a signal about September. We do not think that Powell’s remarks imply a shift away from his previously stated preference for a more careful pace of tightening going forward. We continue to expect [July’s] rate hike to be the last of the cycle. — David Mericle, Goldman

By September 20 or November 1, two or three additional CPI data sets will have been released. We expect the softening of rents to continue. Given this, along with signs of economic moderation, we feel the Fed can stop hiking. If a hike is needed, November is the most likely date for it. We are optimistic on inflation, particularly as rents have turned and many major companies in their quarterly earnings announcements are reporting less of an ability to raise prices. — Stephen Gallagher, SocGen

The Fed isn’t the only game in town, underscoring the importance of other drivers for the USD and the FX market. The important part is that a few pieces of the puzzle are coming together that work against the USD, and in favor of risk assets, carry and lower global macro volatility. Indeed, the Fed appears to be moving to the sidelines just as China will deliver a fairly sizable stimulus package. By extension, the market is likely to drop the US exceptionalism narrative and return to the desynchronized global growth narrative that captured the theme of early 2023. The upshot is that we have more confidence that the Fed is done, while at the same time highlighting that the global economy remains a fair bit away from recession. — Oscar Munoz, Gennadiy Goldberg, Molly McGown and Mark McCormick, TD Securities

On the question of whether the Committee will hike in September, Powell gave a definitive maybe, and if the data warrants, a hold and a hike are both clearly on the table once two more months of inflation and jobs data are in hand. The dovish reaction as the press conference went on was most attributable to the characterization of the distribution of risks as far more balanced going forward, and that the Committee is increasingly of the opinion that the gap between the risk of overtightening and undertightening is narrowing. The takeaway was that while another hike might be needed before the end of the year, at this point the Fed was unwilling to press the amount of future tightening beyond what was forecasted in the dotplot. — Ben Jeffery and Ian Lyngen, BMO

We would reiterate that the FOMC should be reevaluating its forecast of the neutral level. It is hard to believe after the highest inflation in four decades, the neutral level remains where it was prior to the pandemic, while it was 4x the current level a decade ago. — Mike O’Rourke, JonesTrading