The dovish pivot

We’re unsurprisingly seeing some caution in financial markets on Wednesday as we await the Federal Reserve rate decision.

Markets have heavily priced in a 75 basis point rate hike from the FOMC and there doesn’t appear to be any doubt about that outcome. The communication that accompanies it is where the interest is, with increasing numbers anticipating a hint at a slower pace from December.

In many ways that would make a lot of sense. While the economy is still running hot, we are seeing signs of softening to different degrees depending on which part of the economy we’re talking about. The housing market has been under pressure for most of the year while hiring intentions are easing and companies are clearly anticipating tough times ahead.

Given the usual lag with monetary policy, it would be understandable if, after four 75bps hikes, the FOMC decides to ease off the brake slightly. But will they be so bold as to explicitly guide that way? Probably not. They may hint at such an outcome, should the data allow so over the coming weeks. Investors are so desperate for anything remotely dovish at this point that even a hint could get a strong reaction.

Rumours of softer restrictions boost Chinese stocks again

Chinese stocks continued to rally overnight on rumours that we could see an easing of Covid restrictions. While I have no doubt the leadership will want to avoid the constant disruption of restrictions and lockdowns that have heavily weighed on economic activity and confidence, any significant change would be a huge shift from the last few years.

And the fact these rumours haven’t been verified at all suggests there may not be much substance to them, or that any softening will be marginal and hardly effective. That said, it’s been a very tough year for Chinese stocks and investors may be simply jumping at any opportunity to buy the recent lows. I assume we won’t have to wait long to see whether there is anything to this story.

Wait and see

Bitcoin looks to be in wait-and-see mode, much like elsewhere today. It continues to hover around $20,000 and wait for the possibility of some news that could propel it in either direction. Whether Powell and his colleagues will provide that today, time will tell. But it doesn’t always take much for traders to react. Even the slightest hint could trigger a decent move.

For a look at all of today’s economic events, check out our economic calendar: www.marketpulse.com/economic-events/

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