The takeaway from last week's FOMC meeting decision was that we got more of a dovish hike by the Fed. The details have been scrutinised aplenty and when you look at market pricing now, the CME Fedwatch Tool is indicating 85% odds that the Fed will not hike rates in May. That sort of outlook is also reflected in the rates market as Treasury yields have fallen:
10-year yields are hanging on around the lows for the year close to 3.30% and that's a key line in the sand to watch in the days/weeks ahead.
Essentially, that looks to be the threshold in which market participants will be convinced of whether the Fed will stick to its dot plots or if we are going to see a more dovish playbook to come i.e. possibility of rate cuts.
Powell's message to focus on the words of 'may' and 'some' in this passage definitely will keep markets probing:
"The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time."
That being said, policymakers still have a momentous task to bring inflation down back towards the 2% target. There might be signs that price pressures are easing but that doesn't mean that their job is done.
As such, even if markets are not aggressively pricing in further rate hikes now, it doesn't mean that things will not change moving forward. I would argue that rates pricing these days are extremely sensitive and can quickly turn on a dime. So, don't be fooled by what markets are saying now as the situation can rapidly reverse in one or two days' time.
It pays to be flexible in this kind of trading environment. For now, it's all about the next big data and/or risk event. US banks will continue to come under heavy watch but if sentiment continues to pick up, we will have to work with key data releases to get a better sense of when the tightening cycle will end.