Image Source: PixabayMARKETSU.S. stocks closed mostly flat on Tuesday despite a stronger-than-expected retail sales report that helped soothe fears of an economic nosedive ahead of the much-anticipated Fed policy meeting. Sure, the retail sales numbers were a bit stronger, but they didn’t shake the prevailing 50 bp cut narrative—the Fed’s guidance is still shrouded in uncertainty, and traders are bracing for what comes next. The potential for multiple outcomes has everyone’s nerves jangling, particularly for those banking on a soft landing. Meanwhile, dollar bears are consolidating their positions, reverting what was the dominant trend we’ve seen over the past couple of weeks as markets prepare for the opening act of the Fed’s rate-cut cycle.Now, it’s not just about how much they cut—it’s about the forward guidance and that all-important dot plot. Powell, the Fed’s maestro of market spin, could upend the entire narrative with just a few well-placed words in his press conference. Investors are practically holding their breath, fully aware of the high stakes. The immediate question is: Are we getting a quarter-point appetizer or a 50-basis-point feast? But the real action kicks off after that as the rates market gears up for its post-cut shimmy.And let’s not forget that all eyes are on the growth rebound theory. Lower rates reduce borrowing costs, theoretically stimulating economic activity and boosting equity valuations. But here’s the rub: once those cuts start rolling in, the onus is on growth to step up and justify market valuations. Every major economic data release until year-end will feel like a high-stakes economic health check.So, what’s the real macro question? By Christmas Eve, will we be celebrating a jobs market that can support growth, hence equity valuations, or are we all destined for a lump of coal in our stockings if unemployment spikes? In other words, has the Fed arrived too late to the rate-cut party?Investors in Asia and across the globe are likely playing it safe ahead of the decision. The smart money says we’re leaning toward 50bps, but don’t rule out a more conservative quarter-point move. Either way, rate cuts are coming, and the market’s already bracing itself.Meanwhile, the S&P 500 and Dow hit all-time highs, fueled by that surprising retail sales data, which bumped up the Atlanta Fed’s GDPNow estimate to a solid 3.0% growth for Q3. It doesn’t exactly scream “jumbo rate cut,” does it? The consumer appears alive and well, keeping the broader economy from tumbling off a cliff, but here we are, pricing in 50bps cuts, 120bps over the next few months and 240bps in total. Quite the rate cut fever.The question is: Are we overextended on rate cut bets setting up for the head-over-heels tumble? If Powell’s comments or the Fed’s projections hint that these lofty expectations won’t materialize, we could see a quick retrace in stocks, bonds, and non-dollar currencies, particularly the JPY.In FX, what was once a can’t-miss trade—short USD/JPY—took a hit, with the yen losing 1% against the dollar, marking its worst day in a month. Rate jitters are the culprit here, despite the narrowing JP; US 2-year differential that still supports a sub-135 USD/JPY, if not lower.Earlier in the week, traders found themselves torn between signals—on the one hand, the rates market pointed to a weaker dollar. Still, on the other, everyone caught up in rate-cut fever overlooked the tendency for currency moves to revert the dominant trend in the run-up to major rate-shifting events like the Fed’s first cut.The real question, though, is what happens after the cut. A 50bps move will surely rattle the dollar, but traders are just as focused on that dot plot. Will it extend the bullish JPY thesis or throw up a temporary roadblock? If the Fed turns out less dovish than expected, it might stall the dollar’s decline and temporarily disrupt the long JPY play. But longer-term FX traders aren’t losing sleep over it—the jobs market is likely to be the real driver for rates and forex markets, keeping the sell-USD/JPY-on-rally strategy firmly in play.More By This Author:Markets Savor A Big Rate Cut, But The Main Course Awaits With Jay Powell
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