Introduction to the FOMC Release
The Federal Reserve, also known as the FEDS, is in a difficult position as it prepares for the FOMC release. The federal government’s delay in releasing important statistics has left the FEDS with incomplete data, making it challenging to make informed decisions. Despite this, the FEDS will still need to consider various fundamental metrics to determine the best course of action regarding rate cuts or hikes.
Fundamental Metrics Considered by the FEDS
The FEDS consider several key metrics when deciding on rate cuts or hikes. These include:
- Economic Growth (GDP): A sluggish or contracting GDP may lead to rate cuts to stimulate investment and consumer spending.
- Unemployment Trends: Rising unemployment signals labor market weakness, which may prompt the FEDS to lower rates to encourage business expansion and hiring.
- Inflation Levels: The FEDS target 2% inflation, and if inflation falls below this level, rate cuts can help reflate the economy. However, if inflation is still high, the FEDS must tread carefully.
- Financial System Stress: Signs of instability, such as high volatility or banking stress, can prompt cuts to stabilize markets.
- Global Economic Conditions: Weakness abroad can spill into U.S. exports and investment, prompting accommodative policy.
- Yield Curve and Policy Tightness: An inverted or steep yield curve suggests overly tight monetary policy, which may lead to rate cuts to normalize the curve and avoid recession.
Missing Data and Its Impact
The FEDS are missing critical data, including:
- September Employment Report
- Job Openings and Labor Turnover Survey (JOLTS)
- Retail Sales Data
- Gross Domestic Product (GDP)
- Trade Balance and Import/Export Data
This lack of data will make it challenging for the FEDS to make accurate decisions, and the market will be closely watching the FOMC release for any signs of what’s to come.
Analyzing the 20-Year Bond Market
The 20-Year Bond Market shows a large descending wedge pattern that has recently broken to the upside, which is generally a bullish indication. This breakout suggests that sellers are losing control, and a potential trend reversal may be underway. As long as the price remains above the broken resistance, the next technical targets could lie in the $46.50–$47.50 zone.
Implications for the Larger Market
The bullish indication for government bonds can be a sign of bearishness for the larger market. This is because:
- Rising bond prices (and falling yields) typically signal slower economic growth, cooling inflation, or increased demand for safety.
- Declining yields can support equities in the early stages, but if yields are dropping due to economic weakness or Fed easing, it can become bearish for risk assets like stocks.
CME Group Estimates and Market Expectations
The CME group estimates a >95% probability that the FEDS will cut rates by at least 25 basis points. However, if the market has already priced in a 25 basis point cut, this could be bullish only if the cut is larger than expected. The market’s rallying into FOMC suggests that it has expectations that are already being bet on.
Technical and Momentum Perspective: QQQ
From a technical and momentum perspective, QQQ has incredibly bullish momentum, which can be visualized using the momentum probability oscillator. On the hourly, QQQ is holding well above the momentum mean, indicating persistent trendiness backed by a ton of momentum. However, this can fail at any point, and it’s essential to consider the math.
Math Perspective: QQQ
On the weekly perspective, QQQ is pushing the 99% confidence level, with historically only 2.02% of closes above this range. This puts the odds of holding here or above at a 2.02% probability, making it a terrible risk-reward to long here if you’re not already long.
Fundamental Forecast Model
A fundamental forecast model has been trained to predict fundamental catalysts, including FOMC. The model forecasts a ton of volatility tomorrow, and as per usual, dramatic movement in both directions can be expected.
Verdict
The verdict is that while the market may see some retracement to the downside before further moves to the upside, the math predicts this outcome. It’s not because the market is "over-extended" but because the math suggests it. The bullish momentum and technical indicators should be considered, but it’s essential to be cautious and not chase the market at these levels.
Conclusion
In conclusion, the FOMC release tomorrow will be closely watched, and the market will be looking for signs of what’s to come. The FEDS are in a difficult position, and the lack of data will make it challenging to make accurate decisions. The 20-Year Bond Market and QQQ’s technical and momentum perspective suggest a bullish indication for government bonds but a potentially bearish sign for the larger market. The fundamental forecast model predicts volatility, and the math suggests a retracement to the downside before further moves to the upside. As always, it’s essential to be cautious and consider multiple perspectives before making any investment decisions.
