Few meetings can move markets as much as the Federal Reserve’s FMOC meetings, and this week showed us just why. Interestingly, many of those moves during the aftermath were foreshadowed by technical movements over the last several weeks.
Few meetings can move markets as much as the Federal Reserve’s FOMC meetings, and this week showed why. While the Fed held rates steady this month, its outlook for the remainder of the year dampened investor sentiment, as policymakers emphasized the need to weigh future cuts cautiously given the potential for sticky inflation. In the Fed’s Summary of Economic Projections, the committee projected that Core PCE inflation—their preferred measure of price increases—will end the year around 2.7%, up from the 2.5% projection in December. Additionally, Chairman Powell noted that inflation could linger longer than expected due to rising energy prices, especially if conflict in the Middle East persists. Following the meeting, markets saw several shifts, including declines in equities and bonds as interest rates rose. Interestingly, many of these moves had been foreshadowed by technical developments in recent weeks.
The most immediate impact was the shift in expectations for rate cuts from the Fed. The committee was expected to hold rates steady this month, with one to two more cuts anticipated throughout the rest of the year. On Tuesday—the day before the meeting—the market assigned just a 30% probability to the Fed holding rates steady for the rest of the year. Two days later, that probability rose to 69%, with 4% of market participants expecting potential rate increases. It is worth noting that the odds of rate cuts had already been falling prior to the meeting, so the results did not come entirely out of nowhere. The probability of no cuts this year was just 5% a month ago but had risen to 30% ahead of the meeting.
Additionally, the technical picture for interest rates and related markets showed notable developments leading up to the meeting, and this week’s action intensified those moves. Potential events are often partially priced in, so although analysts couldn’t know exactly what the Fed would say, price action had already been showing signs of caution. The U.S. Treasury 10‑year Yield Index (TNX) is often viewed as a gauge of inflation expectations, with yields rising as inflation accelerates. The index reversed back into a column of Xs in early March and has continued to trade in an extremely rangebound pattern. Over the past year, it has been unable to break below 3.9%, which has served as a consistent support level. However, if yields break out of this range—either higher or lower—it could mark the beginning of a new phase for rates and bonds, making the ten‑year chart an intriguing one to monitor.
Meanwhile, the iShares US Core Bond ETF (AGG) moved to a sell signal last week for the first time since April of last year, ending its streak of three consecutive buy signals. The asset class continues to sit in the last spot of DALI and action over the last month has seen AGG’s fund score fall by an additional 0.85 points, bringing it down to a weak 2.11. The past several years have also been historically difficult, with AGG remaining below its highs for more than five years—even on a total‑return basis that includes yield. Unfortunately for the asset class, that does not appear likely to change anytime soon. Recent political, fundamental, and technical developments suggest that the path of least resistance for longer-term rates remains to the upside for the time being, serving as a potential headwind for bonds and other rate sensitive groups.
