It has been a while since a Fed meeting was such a non-event. Not only was there no action taken on rates, there was very little to glean from the release, and long-term bonds barely budged. Yet stocks rallied a bit and the odds of a Fed hike in June jumped. What does that mean?
Fed Preparing Us for a Hike Despite Data
There are three purposes for FOMC releases:
- Communicate the reasons for action or lack of action.
- Give their interpretation of recent data.
- Prepare the market for likely future action.
The first paragraph of the release went way out of its way to excuse a spate of weaker data. The poor March jobs report was dismissed entirely as they only melded it with "recent months" and claimed that "gains were solid, on average." The poor GDP report was turned into a positive when they claimed the labor market was still strong despite the slower economic growth. Consumer spending was middling, but "fundamentals underpinning the continued growth of consumption remained solid." In other words, sure, the first quarter wasn't so hot, but the core fundamentals are there, so it's just a matter of time before the data improve.
My tone probably sounds more cynical than it should. I agree with the Fed's assessment that the first quarter's weakness is probably more of an adjustment after the fourth quarter's strength, but nothing in first-quarter data really suggests some kind of growth reversal.
Where Does This Leave Us for a June Hike?
The fed funds futures market is right to assume this seals the odds of a rate hike in June. Perhaps there is some chance of a horrible April jobs report, but really the ADP number today all but rules it out. Admittedly, +177,000 is good but not great. But remember that last month ADP came in at +263,000 (now revised to +255,000), far higher than the non-farm payroll (NFP) figure of +98,000. If the truth is somewhere in between, then ADP coming out at +177,000 is good news. It means NFP is almost certainly going to print much higher than +98,000 on Friday. Economists are expecting +190,000, but don't be surprised if there is a catch-up here.
So Why Aren't Bonds Weaker?
Bonds were virtually unchanged right after the Fed. They've turned ever so slightly weaker as stocks gained strength in the afternoon, which seems to be more about stocks than the Fed. I think the bond market was fairly confident in a two-hike scenario over the next six to nine months, but was unsure of the timing. Firming up the timing may matter slightly for two-year bonds, but not really for longer-term bonds. As I've written before, the Fed needs to get the market to price in more hikes before we're going to see a major blowout in rates.
If This Release Firms Up June, Why Did Stocks Like It?
My short answer is, who knows why stocks do anything ever? But a more serious answer is that the Fed was silent on anything beyond what would happen very near term. No mention of over-concern about inflation nor any mention of the balance sheet. The stock market is OK with rates being a bit higher, but doesn't want the Fed to accelerate its plans. So a pretty generic Fed release is probably worth a mild relief for stocks.
Nothing about this changes any of my big-picture views for the Fed or bonds. I think rates are a bit lower than fundamentals justify, so for aggressive traders, I like a short position. I'm a bit underweight duration here.