The cooler-than-expected US consumer price inflation report yesterday sparked a big reaction in markets but at the end of the day, it was a case of some being more than others. The dollar was pummeled alongside Treasury yields and there were some notable technical breaks in some dollar pairs as a result. However, stocks saw its early rip higher tempered with and the S&P 500 ultimately fell back below its 200-day moving average after an attempt to get above the key trendline resistance for the year:
It's now over to the Fed to vindicate the kind of moves we saw yesterday and on the balance of things, it might be easier to see that happening as we head into the turn of the year.
The recent softening in Fed chair Powell's policy stance is the key element being added to the backdrop ahead of today's meeting decision and ultimately, one should expect that kind of less hawkish rhetoric to make its way into the statement and press conference. The softer inflation figures will also give the Fed some added flexibility in switching up the language surely.
The only caveat though is the forecasts for the terminal rate that will be shown on the dot plots. The market pricing yesterday saw rates fall back to ~4.8% but policymakers are likely to raise their projections for next year to 5%, or perhaps even slightly more, up from the 4.6% previously.
Slower growth projections could also feed into less confidence about a soft landing but it shouldn't be something that policymakers will harp on too much, especially as they are still going to tighten policy further.
That might temper with any market optimism at the end of the day but considering how this has been a market that is so desperate for hints of a Fed pivot, it may not be too surprising if such a setback is brushed aside when all is said and done.
Just be wary though, that with this being the final full-fledged trading week, positioning and year-end flows could also factor into the equation - in terms of the market reaction - before the holiday season starts to kick in.
But if we do get a straightforward message from the Fed, that is still the trade to go with so long as the technicals also vindicate the underlying sentiment in the market.