There are two major risks that markets are grappling with:
- That inflation stays too high or gets stuck at 4%
- That growth falls off a cliff because rates are too high and the lagged effects of monetary policy
The Fed is in the middle, trying to engineer a soft landing and sounding far too confident about it. A camel has a better chance of passing through the eye of a needle than the Fed of nailing a soft landing so it’s much more a question of on which side they miss.
In terms of how they characterize risks, they’re much more worried about inflation so I’m not going to fight that -- the better bet is that they eventually overtighten and kill growth. That will put a fresh bid into the US dollar and weigh on on risk assets but the timing of how that unfolds is also uncertain.
In any case, there isn’t a great deal to be made in any kind of trade predicting lower growth. The bond market is already there, oil and commodities are down. Stocks are beaten up.
So what’s the trade? It’s one economic data point at a time. I haven’t seen a market so tuned into macro data since 2008. Every data point is a market mover right now and that speaks to the uncertainty. I don’t see that ending so that natural volatility in economic data will add extra volatility to markets. That's exactly what we do here at ForexLive and it's the best kind of a market for macro traders.
A wave of releases starts next week, including December non-farm payrolls. Your most important tool in 2023 is the economic calendar.
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