JPM US Market Intelligence Trading the Fed

Feroli’s Fed preview is here. He expects the Fed will leave rates on hold, with at least 2 hawkish dissents, including those from Hammack and Logan.

The following scenario analysis is NOT A PRODUCT OF JPM RESEARCH, this is a trading desk view from JPM US Market Intelligence. This month we focus on Fed Decision outcomes, and 1-days SPX moves.

· [1%] FED 50BP HIKES – SPX falls 2% – 4%. Losses would be tempered if the Fed included messaging on this being an ad-hoc hike to get above traditional inflation measures but that this move should not be conflated with a series a hikes.

· [20%] FED 25BP HIKES – SPX falls 1.5% – 2% with potentially double the decline experienced in NDX with RTY likely outperforming on the move lower given the market’s shift to anti-Momentum / anti-AI plays.

· [50%] HAWKISH HOLD – SPX is up 25bp to down 50bp. Our base case as the Fed holds based on the strength of labor markets / growth but likely wanting to stay vigilant on inflation where recent energy market price action suggests another wave of disinflation is coming. A 10bps move in Rates produces a beta to DXY of about 0.5 – 0.6 and 1.5% - 2% for SPX. We could see a Hold lead to a weaker USD given long positioning.

· [28%] DOVISH HOLD – SPX gains 50bp – 1%. The best outcome for stocks.

· [1%] FED CUT – SPX loses 1% to SPX gains 1.5%. The reason for the potential negative outcome is if the market perceives the Fed has having lost its independence, which would be reflected in higher yields, wider breakevens, higher vol, and weaker stocks.

· WHAT ARE OPTIONS PRICING? Options that expire on July 29 are pricing ~0.8% move based on July 28th prices. For reference, recent CPI moves have ~1.1% move priced into the event.

· US MARKET INTEL – We think the probability of a hike is less than what the market is pricing, ~30% chance of a hike, given (i) US GDP growth is near its trend level with upside risks and (ii) inflation, while elevated, does not appear to at-risk of an upside explosion.

Further, if the Fed were going to hike, June seems to have been more appropriate when CPI was above Fed Funds.​