1. Moving the markets

The Fed offered no surprise and followed the expected theme of hiking rates by only 0.25% with more to come. A mid-day sell-off reversed with traders focusing on chairman Powell’s acknowledgement of falling inflation:

We can now say for the first time that the disinflationary process has started. We can really see that, and we see it really on goods prices so far.

While that was music to the bullish crowd, Powell gave no real hint of a pause in hikes, maintaining that:

Ongoing increases in the target range will be appropriate to a attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time.

But, he appeared to shrug off the fact that financial conditions have dramatically loosened recently, as ZeroHedge pointed out, a dovish fact that surprised traders and created additional upward momentum off the mid-session bottom supported by another short squeeze.

In the end, the markets expected some hawkish tones during the presser, yet Powell did not bite but maintained a more dovish tone pushing terminal rate expectations to much lower levels. Market participants took that as a Fed in capitulation mode.

This affected bond yields, which retreated sharply, with the 10-year dropping all the way below the 3.4% level, which is its lowest point since last September. As a result, the US Dollar got spanked to its smallest since last April, while Gold shifted into overdrive by adding over 1% for the day to close at $1,967.

$2,000 gold looks to be on the horizon.

1. Moving the markets

Traders and algos alike continued with their relentless efforts to challenge the Fed’s resolve of hiking rates for “higher and longer” by propelling the major indexes higher on the last day of the month and the day prior to the Fed’s much-awaited policy announcement.

Again, much of this January move was based on the Fed at least shifting into “pause” mode, which they eventually will, but likely because of the economy is turning over, which will then mean the rally could be short-lived due to earnings taking a hit.

For right now, the overriding theme is a bullish one with S&P 500 having scored its best January since 2019. The anticipation is for the Fed to hike only a meager 0.25% tomorrow, with an 83% chance of another 0.25% in March being baked in the cake.

A massive MOC (Market on Close) order erased all of yesterday’s losses, while the seemingly ever-present short squeeze contributed to January’s comeback. All this exuberance has now reduced the financial conditions to their loosest since June, as ZeroHedge pointed out. This is just the opposite of what the Fed wanted to see, when they called “unwarranted easing” in the last release of their Minutes.

Bond yields slipped during January, the US Dollar fell for the 4^th straight month, all of which benefited Gold, as the precious metal not only surged for the 3^rd straight month in a row but also gained a solid +5.74% just for January—only a hair below the S&P’s +6.29%.   

1. Moving the markets

Anxiety reigned supreme ahead of the Fed’s decision on interest rates, with the markets having priced in a meager 0.25% hike. That is despite the countless announcements by a host of speakers that “higher rates for longer” are the current policy theme, yet traders have battled the Fed every step of the way.

It’s likely that the Fed eventually will reverse its tightening schedule, but it’s questionable whether that point in time has been reached already. Wednesday’s release of their decision will shed some light on where they are at with their policies. Will the hawkishness continue? The H2 2023 Rate Cut Expectations seem to indicate so.

Adding to the nervousness in the markets will be the continued earnings barrage with some 20% of the S&P members releasing their report cards this week, including some of the tech giants like Apple, Amazon, Meta, and Alphabet.

At session’s end, today’s reality check erased all of Friday’s gains and then some, as the short squeeze ran out of ammo again.

Bond yields rose due to uncertainty about the Fed’s policy decision, the US Dollar dipped and ripped, which caused Gold to drift modestly lower yet remain firmly anchored above its $1,900 level.

We might see more of the same tomorrow.