There's an industry built around guessing what will come next but not nearly enough is written about trading headlines.
Baseball players don't where they're going to swing until the pitch comes.
The May 4, 2022 FOMC decision and press conference was a perfect example. Markets were choppy and volatile in the run up to the decision. There were some opportunities in that but it was mostly noisy mess.
What was important to remember is that US equity markets were down five weeks in a row and the dollar had been in a non-stop rally. So the odds were for a bounce.
To stretch the baseball analogy, the count was worked into the hitter's favour.
he count in this case was the odds of a rate hikes at upcoming meetings. The market was pricing in a 40% chance of 75 bps in June in the days leading up to the decision and rates approaching 4% in 14 months. You have to know the count as a htiter in baseball and rate hike expectations as a financial market participant.
Then Powell lobbed up a softball.
He said the Fed would consider 50 bps at the next two meetings. In normal times that might sound hawkish but a high chance of 75 bps was priced in along with more than 50 for three meetings.
That was the most-tradable dovish headline from Powell in a long time.
Traders didn't need to predict what the pitch would be or where it would be, they simply needed to be ready. That's the kind of pitch to hit a homerun with but there's no shame in hitting a single either. The point is that there's money to be made by being ready and trading headlines.
Those opportunities might not be as plentiful as they were 15 years ago but now that central bankers are making moves and creating rate divergences, they will be more frequent. Be ready and have a gameplan.
/inflation
