Forward Note - 2024/03/17
The Fed's high-stakes poker game - transparency or strategic ambiguity?
Last week, we left you with the warning lights on. Turbulence ahead — return to your seat and wait for the signals to go off before wandering around the plane again.
Well, the sign is still on.
The week was as agitated as it could be with the VIX below 15, and the equity markets were mainly driven by what looked suspiciously like rebalancing flows. Our favorite move? The yo-yo observed in VXX on Thursday went from a low of 13.41 to a high of 14.56. Yes, it's not that much in the grand scheme of things, but when you're in a low-volatility regime, it's enough to be noticed.
In the end, the S&P 500 closed flat at 5,117, while the Nasdaq gave back 1%. Even though it's the second consecutive week of declines, many expected things to end much worse than that. In fact, we've learned that inflation was stickier than anticipated, at the very least. The CPI came in at 3.8%, slightly above economists' expectations of 3.7%. The bigger surprise was on the PPI front, where the market was presented with a 0.6% increase when the expected figure was more in line with 0.2%.
So, why didn't the market tank? The consensus in the marketplace is that these figures are not enough to derail the Fed's course of action—three rate cuts in 2024 and four in 2025. The first one is expected to be in June.
We are by no means economist, nor do we aspire to become one. However, we can see both sides of the argument right now. As Chairman Powell has repeated many times, one data point isn't enough to make a decision. That may have been frustrating for market participants when you had good data until early January. However, that carefulness becomes very handy when you have less favorable data, such as in February and March.
Therefore, we wouldn't expect him to say anything different next week during the press conference post FOMC decision about the interest rates. The same data-driven and cautious approach should color his discourse.
We expect a lot of questions on the June rate cut, though. As a matter of fact, the other side of the argument is that, with only three CPI reports left between now and June, we would need to see a serious decrease from the current level to consider that inflation isn't coming back.
That doesn't leave much margin for error.
Let's be clear—if Jay Powell were to hypothetically mention that no rate cut would happen in June, the market reaction could prove very insightful for the Fed. Would the market finally take that much-anticipated breather after almost six months of furious rallying? Or would it plummet on Wednesday, only to forget everything by the end of the week?
It's all hypothetical, obviously. And needless to remind that we don't sit at the table with Federal Open Market Committee members. That being said, we've watched enough of these press conferences over the past 15 years to understand that it's all prestidigitation, a subtle art form of communication that balances absolute transparency, as you would expect from policymakers, with the nebulous rules of underground poker. And in such tight situation, what better strategy than disappoint now to surprise positively later? It certainly wouldn't be the first time.
Answer Wednesday at 1 pm ET.
In the meantime, resist the urge to overtrade. We were lucky to hear a fantastic conversation between three heavyweights in the weird in-between world of retail and professional trading (do we simply call it prop trading? Asking for a friend.)
At one point, the host mentioned one of his friends who constantly readjusts a core strategy to ensure he is always in the optimal spot to harvest an edge on volatility. They then made the point that these tiny little touches here and there were not doing much for the position. Worse, they increased the probability of mistakes while incurring significant commissions.
A similar reminder came from our Discord channel. A long/short fund manager with experience at some major investment banks reminded the group's retail members that overtrading is the curse of performance. Even with an edge, you should be mindful of your account size, favor the best opportunities, and let the market work its magic.
Even more importantly, you should respect the market environment and with the FOMC meeting on Wednesday, the seatbelt sign is definitely still on, at least until Thursday afternoon, when we will have much more clarity on how the markets have digested the event. Therefore, stay in your seat a little longer.
Come on, we're all adults here—you can hold that bathroom break a little longer.
In other news
Reddit's IPO is right around the corner, and if you're a Robinhood user, you may have been asked to participate. It's fantastic what technology allows in 2024—had you told us 15 years ago that retail investors would be given the chance to participate in an iconic tech IPO through a smartphone, we would have laughed so hard that a trip to the hospital might have been warranted.
It's the same technology that is bringing clouds over the head of the social media darling. The FTC is inquiring about Reddit's use of data for LLM training purposes. Last week, we left you talking about how Claude, which most likely uses Zoom data, felt more comfortable generating realistic human verbal content. The fact that Reddit is fighting tooth and nail against the allegations from the governing body is another sign of the value of this dataset. And what did Twitter/X do to its own API a few months after Musk bought the company? They raised the price to a staggering $500,000 a year.
At that price point, you need to have a seriously good use case, and AI is definitely one.
Thank you for staying with us until the end. As usual, here are a couple of interesting reads from last week:
The
looked into investing in the psychedelic industry. Research in this field has gained momentum over the past decade due to its potential mental health benefits, and this could be a major investment opportunity for investors.Markets move quickly, and losing sight of the big picture is easy.
has you covered with its thorough article about investing over the last 100 years.Finally, this week at Sharpe Two, we continue exploring volatility trading and market regimes, focusing on low-volatility regime setups.
That's it for us. We wish you a wonderful week ahead and happy trading!
Ksander
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