Making Sense of the Recent Fed Narrative
What is the Fed Pivot?
The ‘Fed Pivot’ is a micro-narrative that has developed recently in response to slowing US data. When US data prints negatively, then the prospect of a Fed Pivot is thought to increase.
But what is the ‘pivot’
To pivot simply means to change direction. So, the idea of a Fed pivot is that the Fed will change from its aggressive hiking stance to a slower path of rates.
When is a ‘pivot’ expected?
The markets love micro-narratives, so when bad data comes in from the US the ‘pivot’ calls grow louder. When good data comes in from the US the ‘pivot’ calls grow weaker.
What’s the market reaction?
- * For stocks: If the Fed pivots then that means a lower terminal rate and/or slower path of rates. This is good for stocks. So, the bad news is good news in that sense for the stock market. If there is bad US data expect US stocks to rally.
- * For currencies: If the Fed pivots this weakens the USD. As US10-year yields fall we would expect USDJPY downside and EURUSD upside.
- * For bonds: If the Fed pivots US bond yields should fall as bond buying steps up.
- * For precious metals: A Fed pivot would likely be supportive for precious metals. A falling USD and falling yields should lift both gold and silver. With the gold/silver price ratio pushing higher then silver can outperform gold. Many traders look at the gold/silver ratio and will choose a silver trade over and above gold when the ratio rises.
So keep this framework in mind. When incoming US data make it look like a pivot is coming then expect these reactions. Also, the opposite is true, so if a Fed pivot is seen as less likely then expect the opposite reactions.
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