Fed Fund rate expectations are through the roof, which according to the swaps market is now pricing in 5.2% for June…

That’s above the 5% the Fed has been calling its “terminal rate”… A level where it would potentially pause the rate hike cycle.

Just a few weeks ago, this market had actually been pricing in a rate cut of 50 basis points (bps) toward the latter end of the year… that has now evaporated.

The rates market is telling us we’re going to be higher for longer – and by more than expected.

Recently, it’s been driven by indicators that directly affect inflation like jobs, retail sales, or today’s PPI running hot… again.

The 1-year breakeven inflation rates – derived from the Treasury inflation-protected securities (TIPS) market – are up almost 100% since their lows just a few weeks ago in January, now at 3%.

Stocks don’t care…

Understanding Market Momentum Is a “Missing Link”

Yet this dynamic drove the entire downtrend in markets throughout 2022… knocking down every Fed Pivot narrative that would spring out of nowhere… but always right when a stock market rebound would catch legs.

It’s an example of why momentum is a brain warp… It makes people do funny things, like buy high and sell low.

Fully understanding this is a missing link in the finance world, but its answer exists somewhere at the intersection between the psychologist’s office and the math professor.

But if you’re on the wrong side of the momentum trade – which many macro traders currently are (for the reasons mentioned above) – numbers start to look funny, even to numbers-oriented macro traders.

For instance, last summer the Nasdaq 100 rallied 25% from its June lows to its August 16 high. And it was based on a similar storyline of the all too elusive “Fed Pivot” and the view that “earnings don’t look that bad.”

In addition, we had the same divergence between Fed Fund rate expectations back then as do we now… meaning the data wasn’t matching the narrative.

This rally is up “only” 17.5% from its October lows, less than last summer’s. Yet if you ask any of them… it feels much worse now than it did back last August.

But that’s what the market really is… it’s an interplay between narrative and loosely connected facts.

This is why economists are experts at presenting circumstantial evidence and showing you statistical significance.

To break momentum… the market’s mood needs to change.

Look Out for Market-Moving Events

And one thing’s for certain… as long as every big economic indicator makes or breaks what the Fed is planning – that big mood swing will likely occur at or around the time of its release.

Consider the following…

The S&P 500 lost 19% in 2022. But during the three days following either a Federal Open Market Committee (FOMC) meeting, a CPI report, or a jobs number – it lost 21%.

The Nasdaq lost 25%. And the biggest losses accumulated after a big rally. The period from August 16 to October 13 is a good example of that.

There are about 260 trading days in the year… these events only occur on 32 of them. So, 228 days were basically noise.

And on October 13 (the start of this rally), the S&P 500 opened down -2.25% following a hotter-than-expected CPI report. Then, it reversed and closed up 2.60%.

So, investors need to continue to pay extra attention to these events… and mark up their calendar with big red X’s.

Because on any given release… the mood can turn quickly. 

Regards,

Eric Shamilov
Analyst, Trading With Larry Benedict

P.S. To show readers how to mark their calendars, Larry Benedict is hosting a “Money Shock” opportunity for traders.

It has to do with a pattern that involves government releases… things like inflation reports and jobs data. Things no one paid serious attention to until the recent bear market.

Now, these releases are drawing major attention… especially during 32 specific days of the year.

Larry is going to go over when these days are happening and how you can profit. So, join him on February 22 at 8 p.m. ET and download his calendar by clicking right here.