Very Different Fed Narrative On Jobs
This is a very different narrative on the labour market from Fed's Powell. He repeats how strong he thinks the labour market is going to be soon. He almost has to apologise to all the people he's previously been talking to with the maximum employment language. "There's still a big group of unemployed people and, you know we're not going to forget about them," he says. Taper is sounding much closer all the time. He might not have said it, but investors now know they are thinking about thinking. It's the same on inflation. The transitory talk is more about it being "likely" rather than for sure. This guidance couldn't be more different to three months ago.
Fed Dot Plot Sends Equities Tumbling
US stocks held steady ahead of the FOMC meeting, with many in the market anticipating a fairly dovish tone. The hawkish dot plot surprise resulted in equities falling off a cliff. The Fed's median dot projections showed two rate increases by end 2023, with 13 of 18 officials seeing at least one rate hike by then, and 7 seeing a hike by end-2022.
S&P implieds initially came under pressure as the market traded sideways, particularly with the July tenor pushed lower, while the back end of the curve remained sticky. Vols made a round trip and spiked higher on the spot selloff post-FOMC, ultimately closing +60bp to 20bp out to August.
Flow showed a clear theme around fading recent moves. Tech outperformance was met with protection buying, including a large QQQ put spread rolled higher. Also notable in the index space was a SPY call spread to position for upside out to August, while other S&P flows remain skewed to shorter dated downside. In the same vein, reflationary spaces opened weak then were dominated by upside buying across XLF, XLE, KRE, AMLP. As HYG vol was trading at a premium into FOMC, we saw accounts take advantage by selling vol / buying put spreads to roll protection or cheapen downside. In singles, upside was active across Airlines and Consumer names
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