To The Moon

Financial markets, mostly traded within narrow ranges as investors await the results of major central bank decisions this week. The US monetary authority is widely tipped to hold interest rates on Wednesday, and focus will be on policymaker predictions for where borrowing costs might be further over the horizon. Investors and economists will keep their eyes trained on the policymakers' economic projections that are released at the same time.

In addition, they'll be listening for any hints about the likely path at following Fed meetings, especially the last one of the year on Dec. 12-13. Nearly all Fed officials have been repeating Fed Chair Jerome Powell's mantra of "higher for longer," but the summary of economic projections ("SEP") will offer a view of how high the central bank may go and for how long.

Uncertainty always looms over the Fed's economic outlook, but Powell may emphasize that fact even more during his post-decision press conference given the recent auto workers' strike, oil hitting $95 a barrel and a potential government shutdown.

The latter possibility may worry the data-dependent central bank even more, as government agencies would stop issuing economic reports during a shutdown. The September jobs report is scheduled to come out on Oct 6, days after the government's fiscal 2023 ends on Sep 30.

One more hike in November?

The Federal Reserve is confronting a familiar nemesis as it tries to pilot the economy into a rarely seen soft landing: rising oil prices. Supply shocks such as climbing oil prices put the Fed in a quandary because they simultaneously boost inflation and curb economic growth, leaving policymakers at times uncertain about whether to tighten or loosen credit in response. 

It’s emblematic of the battle the Fed has had throughout the tightening cycle trying to convince investors that rates are headed higher. Now it looks like there’s a good possibility the Fed will tighten one last time, serving another unpleasant dose of reality – and another round of losses - to bondholders.

Sell covered call

Buy call

Sell covered call 2

Buy call 2

On the other hand, markets are betting the Fed has finished this rate-hiking cycle, assigning just a 30% chance to a November increase. If the chair does anything to disabuse the market of that sentiment, it would be meaningful.

An analyst expects the central bank to fall in line with market thinking. “We do believe that the Fed is done here,” she said. “They just don’t know it yet.”

Overall, though, the economy has remained pretty resilient. A hard landing seems to be out of the cards for now, but that can be difficult to predict over the long term, especially if the Fed is late to react to economic conditions (remember the infamous "transitory" call from 2022?).

As a result, the central bank's dot plot for next year might be more cautious as it continues to play defense on inflation and resist signaling anything that might lead financial markets to get ahead of the Fed on rate cuts.

Sliding gradually into FOMC

⚠️ Trading tips: looking at SPY calls above 444 and puts below 441 after FOMC announcement. Let the price settles a little during the talk by Powell to avoid huge price swings. All the best! 🤗

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