A big Fed cut might be a sell-the-news event
Repeats with no changes
Sept 17 (Reuters) -Markets appear finely balanced on whether the Fed will begin easing gradually with a 25bp cut on Wednesday or opt for a more aggressive 50bp move, but if the FOMC does go big, it might become a sell-the-news event for risk sentiment.
Market pricing is split at 60/40 in favor of a 50bp cut, a significant shift from the 15% probability attached to such an outcome after the inflation report on Sept. 11.
Beyond this week's meeting, the next 12-18 months also leaves room for a surprise, with markets discounting a Fed Funds rate below 3% by the end of next year.
Markets have had difficulty forecasting Fed policy of late, having started 2024 with seven cuts priced in for the year.
What’s more, the June dot plot showed the median 2025 rate projection at 4.1%. Though markets expect that to be revised lower, the bar is extremely high for a dovish surprise.
Meanwhile, if a 50bp move this week were to boost risk sentiment initially, it could quickly become a “what does the Fed know that we don’t” moment, leading to a reversal lower.
Seasonals also point towards risk assets heading lower in the near-term, particularly following the triple witching option expiry day, due Sept. 20.
Using data since 2000, on average the S&P 500 has fallen around 1.5-2% in the following two-to-three weeks post September option expiries, which has been particularly evident since 2021. Given this market dynamic, traders may look to fade a spike higher on a 50bp cut to position for the seasonally weak period, further weighing on risk sentiment.
For more click on FXBUZ
Fed pricing for 50 https://tmsnrt.rs/3ZuayNg
2025 dots vs pricing https://tmsnrt.rs/3Twhm9k
SPX and Sept Opex https://tmsnrt.rs/3MM5rk7
(Justin McQueen is a Reuters market analyst. The views expressed are his own.)
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