FOMC: Preview and Scenario Analysis

Summary

• Our base case is no major changes in the dots, economic projections, or during the presser.
• The first paragraph in the statement could be updated to reflect recent economic developments.
• We think the longer-run dot will increase marginally from 3.0% to 3.1%.

Market Implications

• We expect some rates selloff and bear flattening, alongside equity weakness and dollar strength.
• Full details below, including more hawkish and dovish scenarios.

Positioning, Sentiment and US Rates Technicals

• Our Positioning and Sentiment Report shows investor sentiment was net negative for the sixth consecutive week; hedge funds (HF) reduced EUR net shorts with real money (RM) increasing material EUR and JPY net longs.
• HF maintained sizeable net shorts across the US rates curve, while RM maintained material net longs across the curve.
• RM trimmed net longs across all US equity futures contracts, while material HF net shorts were decreased in US stocks.
• Our US Rates Technical Report shows RSIs have retreated to neutral across the UST curve.

Market Pricing vs SEP Dot

• The market expects the two main dots in the SEP (2025 and 2026) to remain the same. We agree.
  • SOFR Dec25 is priced at almost 3.8%, slightly below the current 2025 dot at 3.9% (two cuts).
  • Roughly from Jun26 onward, the market starts to price higher yields vs SEP dots: from about 3.6% (SOFR Jun26) to about 3.8% (SOFR Dec28) vs the current SEP dot (3.4% in 2026, 3.1% in 2027, 3.0% longer run).
• The terminal rate is priced at about 3.9%, much higher than the SEP dot.

Base Case – No Change Except Long-Term Dot From 3.0% to 3.1%

Statement

First paragraph updated to reflect uncertainty and signs of slower consumer spending. Changes to the statement only in first para because easing stance is not in play this week.

‘Recent indicators suggest that economic activity has continued to expand at a solid pace, although uncertainty is high, and consumer spending appears to moderate. The unemployment rate has stabilized at a low level in recent months, and labour market conditions remain solid. Inflation remains somewhat elevated.’

SEP

SEP unchanged, except for long-term dot, which could rise from 3% to 3.1%.

Presser

Economic assessment unchanged:

• Economy still strong.
• Labour market conditions remain solid, with gradual and orderly cooling.
• Inflation is slowing – less than it was but still notable.
• Market selloff: financial conditions (FCs) need to change in a lasting manner to impact the economy and therefore monetary policy. Fed targeting inflation and unemployment, not equity market.

Administration policies:

• Need to know net impact on demand and supply of trade, immigration, fiscal policy, and regulation policies.

Policy outlook:

• Policy is well positioned to respond to either weaker employment or higher inflation.
• No change in data dependency: ‘we are not on preset course, decisions taken meeting by meeting.’

Expected Market Moves

We think Powell will try to make this meeting a non-event and will try to be ‘as neutral/balanced as possible’. In our base case, we do not expect very large market moves: ‘a neutral/balanced’ Powell will be seen by markets as ‘the Fed put is not yet in the money’, but maybe ‘not too much out of the money’. Still, we expect some bearish market reaction. Recent correlations would suggest higher yields, higher equity and possibly some dollar strength, but we think this time the S&P could fall and the dollar rise.

• STIR (SOFR Dec 2025, Jun 2026) ~ -5/-7bp (change in price).
• 10Y and 30Y ~ +3/+5bp (change in yield).
• S&P ~ -0.7% to 0%.
• DXY ~ 0% to +0.3%.

Dovish Scenario: Highlight Growth Slowdown

Statement

Stress growth weaknesses (since no inflation progress since mid-2024).

‘Recent indicators suggest that economic activity has started to slow from the rapid pace experienced in 2024. The unemployment rate has stabilized at a low level in recent months, and labour market conditions remain solid. Inflation remains somewhat elevated.’

SEP

SEP: one more 2025 cut, small downgrade of macro data (since economy would be supported by three Fed cuts); no change to core PCE to convey that they are constrained by lack of disinflation.

Presser

Economic assessment somewhat more pessimistic on growth:

• Emerging signs of economic weakness.
• Labour market conditions remain solid, with gradual and orderly cooling but risks are rising.
• Inflation is slowing – less than it was but still notable.
• Market selloff: continued tightening of FCs could impact growth.

Administration policies:

• Need to know net impact on demand and supply of trade, immigration, fiscal policy, and regulation policies.

Policy outlook:

• Policy is well positioned to respond to either weaker employment or higher inflation
• Stress employment weaknesses as greater concern than inflation.

Expected Market Moves

While initially it could be slightly positive for equity on a ‘more dovish Fed’ and on ‘a Fed put already in the money’, we think it will not last, and it will be bearish for equity. The market reaction will probably be more material, because obviously the market could become more worried about the state of the economy.

• STIR (SOFR Dec 2025, Jun 2026) ~ +15/+20bp (change in price).
• 10Y and 30Y ~ -9/-13bp (change in yield).
• S&P ~ -1.5% to -2%.
• DXY ~ -0.8% to -1.1%.

Hawkish Scenario: Understate Risks to Growth, Highlight Inflation Stability

Statement

First paragraph to highlight lack of progress on inflation, no change to economic outlook.

‘Recent indicators suggest that economic activity has continued to expand at a solid pace. The unemployment rate has stabilized at a low level in recent months, and labour market conditions remain solid. Inflation remains somewhat elevated. In recent months, there has been a lack of further progress towards the Committee 2% objective.’

SEP

SEP: still two 2023 cuts because not enough info to justify only one cut, but could raise inflation forecasts to express their concerns.

Presser

Economic assessment stresses lack of progress on inflation, downplays risks of growth weaknesses:

• Economy still strong.
• Labour market conditions remain solid, with gradual and orderly cooling.
• No disinflation progress since mid-2024.
• On the recent market selloff: too soon to assess impact on economy.

Administration policies:

• Need to know net impact on demand and supply of trade, immigration, fiscal policy, and regulation policies.

Policy outlook:

• Policy is well positioned to respond to either weaker employment or higher inflation, will require actual inflation slowdown to ease.

Expected Market Moves

• STIR (SOFR Dec 2025, Jun 2026) ~ -10/-12bp (change in price).
• 10Y and 30Y ~ +6/+8bp (change in yield).
• S&P ~ -1.4% to 0%.
• DXY ~ 0% to +0.6%.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs. You are not permitted to publish, transmit, or otherwise reproduce this information, in whole or in part, in any format to any third party without the express written consent of Macro Hive. This includes providing or reproducing this information, in whole or in part, as a prompt.)