What's in the price?

42 and counting....will there be a 43?  History says that equities typically rally on Fed days, but as noted previously there seems too be some complacency out there.  Liquidity is by far and away the most powerful argument in favour of buying stocks here, so if the Fed does anything to suggest its withdrawal, there could be a reaction.

Most readers will have access to ample previews of today's meeting elsewhere, so Macro Man need not rehash the exercise here.  Suffice to say that he expects the growth and unemployment forecasts to be nudged lower, with inflation perhaps ticking slightly higher.  As for the godforsaken dots, he reckons they are broadly stable or perhaps tilted very slightly higher (on financial stability concerns.)  He wouldn't be surprised, incidentally, should the Fed decide to dispense with them altogether one of these days.

Of more interest, of course, is what might be priced into markets.  As noted above, stocks do not seem to worried about any challenges from los Federales.  The performance since just before the last quarterly Fed meeting has been solid, notching a 4.5% total return.

What about bonds?  Obviously Treasuries have performed very strongly for most of this year, including much of the recent period of equity out-performance. More recently, however, they've rolled over a bit, suggesting the pricing of at least a modest risk premium that the Fed turns hawkish.    Well, either that, or it's a reaction to the perception of a greater inflation threat (which in a sane world would imply a hawkish Fed!)

The short end is perhaps even more cognizant of the risks of a hawkish out turn.   EDZ5 isn't anyone's idea of a long-duration eurodollar contract, but Macro Man finds it useful as a benchmark to gauge the timing and magnitude of the early part of the tightening cycle.   Although the contract does still not fully priced the median of "the dots", we do know that Yellen kind of wants us to ignore them.  Tellingly, however, Z5 is now priced lower than it was the day before the hawkish surprise in March.

What about FX?  Given the lack of volatility it's hard to know if anything has been priced or if FX punters have simply nodded off a la Abe Simpson.     Looking at the DXY or EUR is problematic because of the ECB's  recent activities, so Macro Man plotted USD/JPY.   Back to sleep, Grandpa!

Finally, Macro Man checked out the price of oil.  Unsurprisingly, it has displayed the most impressive price action, rallying 9% or so since just before the March Fed meeting.  On the face of it, one might think it would therefore be ripe for a correction, particularly in the even of a hawkish Fed.   Of course, the Fed isn't the reason it's up here, so it's not altogether why anything the Fed does should take it demonstrably lower, either.

So there you have it.   From Macro Man's perch, stocks look most vulnerable to a hawkish Fed, and some fixed income instruments could be most impacted by a dovish one.  Not exactly earth-shattering, admittedly, as there will clearly be a reaction across all assets in the event of a skewed surprise.   Good luck!