My pre-Fed post was dead on, and I don't mind crowing a bit about it. First a look at the actual statement. There are three key changes.
- Housing market was described as stabilizing in January. Now "adjustment in the housing sector is ongoing."
- Inflation had "improved modestly" back in January. Now inflation has "been somewhat elevated."
- The January statement said that "additional firming... may be needed." Today's statement drops that language entirely.
In isolation, you can't call it a "dovish" statement, but obviously given the market's move the street was expecting a hawkish statement. The Fed is setting us up for a summer time cut, and the market is loving it. The 2-10 slope is now dead flat (more than 6bps steeper on the day). The Dow is up 170 points. Swap and corporate spreads are tighter.
The market is telling you that a Fed cut or two will right our economic ship. That's what I've been saying for a while now.
Where to from here? Well, today's big move in the 2-year and the 2-10 slope will require a little time to digest. So its possible we give back a bit short-term. Over the course of the next few months, the question will become how many cuts do we get. If I'm right, and its only 1-3 cuts, then the 10-year will likely sell off from here, to the 4.7-4.9% range. The 2-year will sell off also, but probably only into the 4.6% range. The long bond should push 5%.