December 14, 2022
Fed Preview: Today’s updated median dot for ’23 will have implications for terminal rate expectations and equity markets. Terminal rate expectations have been the single most important cross market for the S&P 500 (SPX) since mid-April. Bond markets are currently pricing in a 4.81% terminal rate effectively achieved at the May meeting. A 25bp increase in the updated ’23 dot should be an equity friendly outcome by keeping terminal rates in the current 4.75-5% range. By contrast, a 50bp increase in the median ’23 dot would shift terminal rates into the 5-5.25% range, putting equites under pressure. Most people expect Powell to deliver a more hawkish message as a counterbalance to his incrementally dovish speech that induced a +3% rally in the SPX on November 30. While that expectation fits Powell’s pattern, it doesn’t fit with the recent trajectory of inflation data. A relatively anticlimactic press conference seems to make more sense with a data-dependent Powell biased to the Fed’s higher-for-longer message.
Next: A catalyst vacuum develops next week as the macro calendar thins out into the holidays. Catalyst vacuums tend to lead to trend continuation with the events over the next few sessions largely deciding the direction of markets into year-end. As a side note, the lack of macro catalysts over the next 2 weeks will make company earnings more important for the broad market with FDX, KMX, MU and NKE scheduled to report next week. CQ4 earnings season kicks off on 1/13.