SUPERNEWS

Macro

Zervos Critiques Rate Cut Hopes, S&P 500 Dips After 6 Months

Markets Misread Fed's Cautious Stance, Leading to S&P 500's First April Decline in Six Months Amid Rate Cut Speculation

By Barry Stearns

ᐧ

5/8, 11:29 EDT
S&P 500
iShares 20+ Year Treasury Bond ETF
iShares 7-10 Year Treasury Bond ETF
article-main-img

Key Takeaway

  • Market overreaction, not the Fed, blamed for recent turbulence; S&P 500 sees first decline in six months.
  • Rate cut expectations for end-2024 were overly optimistic, with seven cuts priced in then adjusted away.
  • Zervos praises Fed's success in anchoring long-term inflation expectations despite significant supply shocks.

Market Misreads Fed's Signals

In the latter part of 2023, the financial markets anticipated a more dovish Federal Reserve, pricing in seven quarter-point rate cuts by the end of 2024, buoyed by Jerome Powell's perceived pivot and the December FOMC dot plot. However, this optimism was short-lived as the first four months of 2024 saw these expectations completely reversed, leading to the S&P 500's first decline in April in six months. This recalibration reflects a broader misjudgment by consensus forecasters, who now face criticism for their overly optimistic rate cut predictions.

Fed's Stance and Market Reaction

The market's overreaction and subsequent correction underscore a fundamental misunderstanding of the Fed's policy trajectory. Despite initial interpretations of a dovish shift, the Fed's actual stance remained more cautious, leading to a significant realignment in market expectations. This scenario highlights the challenges in forecasting Fed actions and the volatility that can ensue from misinterpretations. Notably, Stanley Druckenmiller criticized the Fed for reigniting inflation through its policies, while others pointed fingers at fiscal policies for market disruptions.

Strategists Reassess Positions

Amidst this backdrop, major banks and strategists are reassessing their positions for 2024. Barclays and Citigroup have diverged in their strategies, with Barclays recommending shorting fed funds futures and Citigroup expecting multiple rate cuts within the year. This divergence reflects the broader uncertainty and debate surrounding the Fed's policy path. The Treasury market's neutral stance, as evidenced by the coverage of bearish positions and the surge in futures block activity, indicates a cautious approach by traders as they navigate this uncertain landscape.

Street Views

  • Stanley Druckenmiller (Neutral on the Federal Reserve's actions):

    "He didn’t fumble on the 5-yard line."