Stock traders take on a Fed as bewildered as they are

(Bloomberg) – Fifty or 75? Title or Core? Prices at the pump and in the basket, or expectations of what they will one day be?

Traders looking to bet on the path of Federal Reserve policy and its impact on the economy complained of being left bewildered after Chairman Jerome Powell’s press conference on Wednesday. With little to base an investment case on, it took them less than a day to decide to sell it all.

There was a time when investors could be relatively certain of the direction the central bank was taking, even in times of crisis. Today, with inflation spiraling out of control and the risks of a recession rapidly rising, it is impossible to determine what will happen next.

“It’s hard for everyone, including Fed Chairman Powell, to admit, but we don’t have a crystal ball, the Fed doesn’t have a crystal ball on inflation,” he said. Anastasia Amoroso, chief investment strategist at iCapital, in an episode. from the “What Goes Up” podcast. “We have capitulated to this view that we just don’t know what the next print of inflation will look like. Fingers crossed, we hope it’s lower than the month before. But the reality is that we don’t know.

The S&P 500 fell 3.3% to trade at its lowest level since the end of 2020. The fact that this was the worst session in just three days is a testament to the chaos that has gripped the markets lately. . The Nasdaq 100 was down 4% on Thursday. Bonds, Bitcoin, all sectors of the S&P 500 fell – little was spared.

Powell on Wednesday announced the biggest central bank interest rate hike in nearly three decades, while admitting that whether a recession will happen is in many ways out of his hands. The president also approved a rate hike well into restrictive territory as he seeks to steer the central bank through a slowing economy, something few in his position have managed to pull off.

A big question – whether the Fed will hike 50 or 75 basis points next month – has remained unanswered. His attention to headline inflation figures, which include volatile swings in food and energy prices, also seemed puzzling.

The Fed’s forecast and Powell’s comments revealed a host of “contradictions,” according to Bespoke Investment Group. Among them is a prolonged discussion of the importance of headline inflation, at the expense of the central bank’s favorite measure that cuts energy and food costs. Powell said hikes of 75 basis points would not be common, then in the next breath a hike of that size was possible in July.

Traders were unsure how to handicap the next move, or what metrics to focus on as data rolled in over the next six weeks.

“Chair Powell believes consumer inflation expectations are threatened by headline inflation, but he also believes current headline inflation rates have no fundamental impact on expectations,” Bespoke wrote in a note. . “Which is it?”

After a decade of allocation decisions made easy — buying large-cap US tech, mostly — things are getting tough again, said Max Gokhman, chief investment officer at AlphaTrAI. Not only do investors have to predict what the Fed will do, but also what the market will expect it to do. “That means there could be tactical plays in the cyclical sectors that erupt if the Fed doesn’t turn out to be more hawkish than the consensus forecast,” he said. “The reverse could mean that the temporary shelter will be entirely outside of US assets.”

That makes it a nuanced market, Gokhman added. “Recipients must work to earn their fees now.”

Investors are definitely wondering if the Fed has the answers, said Chris Gaffney, president of global markets at TIAA Bank. “Confidence is so important with central banks and I don’t think the latest moves show much confidence.”

On Thursday, meanwhile, mortgage rates jumped the most since the 1980s, hurting homebuilders. That, among other data impressions, doesn’t exactly inspire confidence, according to Simona Mocuta, chief economist at State Street Global Advisors.

“The day after the Fed hiked 75 basis points, you got a bunch of bad data. So I’m like, OK, well, it’s not such a strong economy,” Mocuta said. “The timing is a bit confusing – to speed up the timing so far. We were already worried before about a downturn/recession. I think those worries have just intensified.

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