January’s price action is “sloppy,” but no one’s especially enthusiastic about fighting the Fed.

That was one message from BofA’s Michael Hartnett who, in the latest installment of his popular weekly “Flow Show” series noted that US jobless claims at five-decade lows suggest the Fed should be hiking, not cutting, in light of core inflation that’s still double target.

But that’s not how the Fed’s leaning. They’re not leaning in the direction of deep, hurried cuts either (as Chris Waller made clear this week), but exactly nobody expects more hikes. And some cuts are a virtual certainty this year. So, what can you do?

Yields have moved up off the local lows, and attendant dollar strength in the new year is “negative in a lightly positioned market, but [traders are] still pricing in 140bps of Fed cuts in 2024, and the zeitgeist is firmly ‘buy-the-dip’ as Powell’s pivot means H1 upside is bigger than downside,” Hartnett said.

As discussed here on two separate occasions this week, the recent trimming of rate cut wagers in the US should be conceptualized as the market pricing a lower probability of a recession scenario which, while bearish to the extent it’s a de facto “tightening” for an equity market that re-rated commensurate with cut pricing for 2024, isn’t in itself “bad” given that a best-case outcome is no recession with insurance cuts, not hard landing with panic cuts.

Recall that the January vintage of BofA’s closely-watched Global Fund Manager survey (summarized here) showed investors are clear about one thing: What matters for equities and bonds in 2024 is the Fed.

“The market is very Fed-dependent; meanwhile the Fed is data-dependent,” Hartnett went on, calling the macro “ambiguously strong.” By that he meant there’s some disagreement between, for example, claims and PMIs.

The bottom line, he said, is that “in the absence of any Q1 Powell pushback, the Q4 Fed pivot, a deflationary China, lower goods prices and all this in an election year, means investor sentiment [is] bullishly skating to where the puck is going — a lower Fed funds rate.”