Well, we finally got the most important piece of data pre-Fed only to find out it was not the most important piece of data.
The employment message was mixed. On one side we saw a robust NFP number and positive revisions while on the other side the unemployment number rose to 4.2% and almost rounded up to 4.3%. Average hourly earnings were also higher.
But it was the comments afterwards from Fed members that (once again) shows that the Fed has shifted back to a "single mandate" Fed again.
The reasoning for this is patently obvious. Despite their pushback they are fully aware what the overall composition of policy is going to be in q1 is going to be and they are clearly concerned that it can have an inflationary impact. Despite the "wait and see" comments they also clearly remember how that worked out in 2021-2022
These comments on Friday strongly focused on inflation and particularly referenced (as did Chris Waller previously) that the numbers into the Dec 18th Fed meeting would be instrumental in the decision. I think we can probably in that respect forget retail sales.
Chris Waller did reference that as a "number" to watch even though it gets released on the first day of the Fed meeting.
Now it is clearer why he did.
The message is that they will decide on the day (18th December) what to do.
The other thing Waller made clear is that the combination of the CPI numbers on 11 December and the PPI numbers on the 12th of Dec will give them a pretty clear picture for what PCE will deliver at the end of the month.
So, as per the title of this piece the decision is "as clear as mud right now"
As it stands, a cut in December has a clear edge, but even if that comes it will also be clearly a hawkish cut with strong guidance that January will likely be a pause.
However, if CPI/PPI deliver upside surprises a late shift to no cut (Just like the late shift to 50 in September) is back on the cards.
With the recent move in yields this is starting to make the risk reward very skewed. This could become a buy the rumour/ sell the fact or even worse buy the rumour but as J M Keyne's famously said...
“When the facts change, I change my mind. What do you do, sir?”
If, as we approach the meeting, we rally even further especially if the 2-year yield closes in on the 4.04% target the risk of being long Fixed income with only really one real week of trading left at that point gets tenuous at best.
Equities will also likely rally into the Fed meeting as expected but maybe some caution would be appropriate at that point. Remember Christmas 2018 and Jay's hawkish message that derailed the stock market. From the high on 19th December 2018 (when the Fed hiked 25 bp's as expected but Jay delivered hawkish rhetoric) into 24th December the S&P fell about 9%.
The upward path on the SPX still suggests close to 6,200 by the Fed meeting but that, if seen, as well as 4.04% on the 2-year yield and possibly 1.0760 on EURUSD feels like where you fade these moves.
