What a roller-coaster in markets post the FOMC. We have been writing about how markets slowly but surely started acknowledging the “right risk tail” in the distribution of outcomes for SOFR rates, but Powell is pretty clearly trying to keep the outcome space left-skewed by clearly stating that cuts are likelier than hikes. This is dovish (vis-a-vis current probabilities). At the same time Powell is trying to construct a story of “high for longer”, which basically means that we need to price a narrower outcome space around the current SOFR spot – also into 2025. Maybe this even speaks in favour of receiving rates vol?

This basically also means that the economy is more likely to run hot than the opposite, as the FOMC members will be slower to respond to a continued re-acceleration in growth- and inflation than the opposite. This is fuel for the reflation narrative that has otherwise taken a beating in recent weeks, not least due to weakness in Manufacturing gauges.

The manufacturing momentum is though a bit trickier to judge after yesterday’s report. There is clearly a (temporary) setback for the restocking trend after a few months of increases in input costs and the re-acceleration above 55 in the activity index is less clear.

Chart 1: Orders to inventories not sending as clear a signal for ISM Manufacturing