FOMC decision

Probably the neatest synthesis of what’s happened overnight is “a reduction in the pace of tightening“.

The Fed notes it is too soon to declare victory but also knows it is largely coming to the end of its tightening cycle, and thus going slow, and being data dependant, is advisable.

There were two additional hikes in the newly released “dot plots” (the views on where rates will be, over time, by Fed members, and usually we refer to the median dot when discussing it), and, to avoid sounding overhawkish, at the Fed press conference held after the decision, Powell stressed that they (those dots) might not be reached, that they aren’t explicitly guidance. Again, it all comes back to inflation and what happens there.

Perhaps slightly bullishly, they revised up their expectations of GDP growth in the Summary of Economic Projections (SEP), suggesting that they too see a “soft landing” as their base case (before, the prior SEPs seemed to be implying a recession).

So, for all the “shock” of 2 extra hikes and the removal of the implied recession in the SEP, market movements are…about as they were.

Longer-dated yields fell slightly, and shorter-dated ones moved higher. Thus the yield curve inverted further.

Equity markets moved a little, mostly the NASDAQ, and oil fell, which is the dynamic of the past month continuing.

From our perspective, we see good reasons to have a large chunk of equities, supporting one’s SAA. Equity risk premia remain attractive, some decent regional valuation differentials (e.g., Europe, UK, EM) are on offer and the Fed targeting goldilocks (as opposed to hiking into oblivion) is a very good thing.

At the same time, we can see some of the cracks in the data, initial claims being one of them, the job openings decline (from peak) being another, which suggests that the full force of tightening is yet to be felt, and indeed these metrics could overshoot to the downside.

Since you’re getting paid well in fixed income, having a bit more credit and a bit more duration is appealing, in our view, and hence that’s where our overweights are.

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