Remaining Unfazed
At a Glance
The FX desk suggests that the resilience of the stock market post-Fed hike reflects stronger underlying economic fundamentals, challenging the historical narrative of a sell-off following rate increases. Per the full note from J.P. Morgan, while rates traditionally pressure risk assets, the current macro environment, characterized by robust economic data, suggests that equities may sustain upward momentum despite higher rates. This condition positions traders to remain vigilant about potential shifts in sentiment should economic indicators begin to show weakness.
Key Takeaways
- 01Stocks are exhibiting resilience post-Fed hike, defying historical trends.
- 02The stronger macroeconomic backdrop may support equities despite higher rates.
- 03Investors are adapting to a 'higher-for-longer' rate environment.
- 04Watching Treasury yields could offer insights into ongoing FX dynamics.
Full Analysis
What the desk is arguing
The thesis posited by the FX desk is that the stability in stock markets following the recent Fed rate hike could signal a new paradigm in market behavior. The resilience seen is likely underpinned by stronger macroeconomic fundamentals as indicated by J.P. Morgan's analysis.
Historically, a rate hike has typically coincided with an average 4% decline in the S&P 500 in the six weeks following the start of a hiking cycle. However, the current context, where a buoyant economic backdrop offers support, suggests that this narrative may not hold firm in the present instance.
Where it sits in our coverage
Currently, our consensus target for the relevant currency pair is 1.075, with a range of 1.04 to 1.12. Notably, firms see targets clustered around this level: - J.P. Morgan: 1.10 (Mar26) - BofA: 1.04 (Mar26)
This view aligns closely with the positioning of J.P. Morgan; however, it slightly diverges from BofA, which holds a more cautious stance at the lower end of the spectrum.
How other firms see it
Among aligned firms, J.P. Morgan expresses a bullish stance supported by favorable macro conditions. Conversely, BofA adopts a more bearish perspective, reflecting concerns over the longevity of the current economic expansion.
Traders should also monitor the correlation between U.S. Treasury yields and stock performance as key indicators influencing FX markets, particularly in the EUR/USD space in the context of Fed policy actions.
Market Implications
Traders should be alert to shifts around the 1.07 level, as a breach could catalyze further movement. Given the economic outlook, the upcoming employment data could serve as a critical gauge of labor market conditions influencing Fed policy stability.
From the original
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Related speeches
4 itemsGlobal FX: Post-CPI and pre-Fed FX round up
In the wake of the US CPI print and leading into the FOMC meeting, the desk suggests that certain currencies could demonstrate resilience amid a Fed hiking cycle. Per the full note from J.P. Morgan, notable resilience can be observed in currencies tied to robust economic fundamentals, while weaker currencies may struggle in the tightening environment. Currently, there is no significant calendar catalyst altering the immediate sentiment in the FX space.
US Rates: Life, Liberty, and the pursuit of hawkishness
The desk anticipates that the Federal Reserve's commitment to a hawkish stance will continue to shape the U.S. interest rate landscape, potentially leading to upward pressures on yields and, by extension, on the dollar's performance. Per the full note from J.P. Morgan, strategists highlight lessons learned from past mid-cycle hiking phases, indicating that past behavior can provide a framework for understanding current conditions. The current rate forecast underscores ongoing concerns about inflation that may prompt the Fed to extend its tightening cycle beyond market expectations. This aligns with data indicating that inflation remains persistently high, evidenced by the latest CPI readings remaining above the Fed's target, which argues in favor of sustained hawkishness in U.S. monetary policy.