For months, investors have been eagerly awaiting a Federal Reserve policy pivot. But now, at least for some, it might come too soon.
The latest MLIV Pulse survey suggests that if the Fed Chair Jerome Powell gives any dovish signals during this week’s press conference, he might send investors scrambling.
Almost half of 250 respondents polled last week said they were buying the dollar ahead of the Nov. 1-2 meeting, and about 78% expected two-year Treasury yields to go up. These bets, which worked out well through the Fed’s aggressive tightening, could go sour if Powell suggests a step down toward a 50 basis-point rate increase in December, or quarter-point moves to finish off the Fed’s hiking cycle in early 2023.
The Fed is projected to raise rates by 75 basis points on Nov. 2 as it wages its battle against relentless inflation. The aggressive tightening campaign, threatening to push the US into recession, has left Treasuries on pace for their worst annual decline on record and stocks for the biggest losses since 2008. To be sure, rising hopes of a dovish signal allowed for recovery of some of the losses last week.
As for the survey respondents, many are neither buying the short nor the longer end of the Treasury yield curve in advance of the Fed meeting. More than 60% of survey participants see the Bloomberg Dollar Spot Index higher a month from now.
That suggests potential for a major reaction in the currency and fixed-income markets on any strong signal of deceleration in rate hikes.
“The data does warrant a Fed pause,” Alec Young, chief investment strategist at MAPsignals, said in an interview. "Markets are hoping for that, and would rally if we actually get that — because there's still a lot of skeptics."
Recent moves by Fed peers suggest a dovish surprise isn’t impossible. The Bank of Canada and Reserve Bank of Australia each raised their benchmark rates by less than economists and traders had expected at their most recent policy meetings. The European Central Bank was also perceived by investors to have been less aggressive.
Some traders have seen enough to attempt front-running a softening in the Fed’s hawkish tone. The dollar is on pace for its first monthly decline since May and stocks have risen from their lows of earlier this month, despite disappointing earnings from a number of technology giants.
“If the Fed gives us a 50-basis-point rate hike in December, there is going to be a relief rally in the market,” Nicole Webb, SVP and financial advisor at Wealth Enhancement Group, said in an interview.