The new interest rate number is released at 2pm. Up until that point the market stays relatively tame and flat.
Between 2pm & 2:30pm things get more jumpy, I would not be in a position at this time.
J Pow talks at 2:30pm, I’m guessing his speech is around 10-minutes because those two candles tend to end negative. (Mr. tough guy being all hard with his speech.). However, starting with the next 5-min candle we always go GREEN, when he’s doing Q&A with reporters and being Mr. Softy that everything is going to be alright!
Will we see another repeat of this? Or will J Pow put his foot down and continue to be firm and hawkish? Or maybe the market just doesn’t care?
I need to go through the charts again and track the percent movement. @Navi thought it would be a good idea to compare SPY QQQ and IWM to see if movement is more pronounced in one vs the other. So I’ll be posting that data in a little bit.
UPDATE: Okay here’s both the dollar and percent movement. It looks like most of the time QQQ moves the most so would likely be the most profitable, however SPY comes very close. IWM dollar movement is about half, but the share price is about half so you would end up trading double the contracts and it all comes out the same. I would just say trade whatever you are most comfortable with.
May - 50bps - Was pretty much a given a month before.
Jun - 75bps - Was expecting only 50bps until literally the day before! (Probably why more volatile but still went up)
Jul - 75bps - Was anywhere from 75-95% confident about 1.5 weeks before.
A lot of the market’s reaction will be based on how what the Fed puts out at 2pm and what JPow says says at 2.30pm compares to a 75/75/50 expectation, and the 4.5% terminal rate.
Will be watching the link @TheMadBeakerlinked above like a hawk for that repricing. Here is the FOMC-eve snapshot:
Unless the 2pm release is totally out of whack, we could go up between 2 and 2.30 as event vol dissipates. Then the real fun starts at 2.30pm.
Fwiw, irrespective of what JPow says, I think market will end up pricing in a 5% terminal late soon enough, but that is a different conversation.
Sorry for the confusion. I was trying to point out how the timing of when to time a position lined up and the 10% strategy. I should’ve been more clear with my reply.
Looking back at May and July rate hike days, where the final rate hike decision was the one that was expected for at least a week, I’d say that the market volatility from 2 PM to 2:30 PM was pretty muted.
We can see that the June reaction had more downward motion from 2 PM to 2:30 PM, probably because the higher rate hike was only starting to price in the day before, as opposed to having a whole week to a month.
In today’s case, it seems safe to say from all the recent market turmoil that a 75 bp hike is priced in, similar to the May and July instances. Therefore, my guess is that if a 75 bp hike happens, the market volatility will also be pretty muted. At the time of writing, the !fedrate command shows an 81% chance of a 75 bp hike. My guess is that the market will then be mostly quiet and all eyes and ears will be on the conference for signs of JPow being a dove or hawk.
Dovish language would be JPow being flexible, saying they are open to slowing the pace of rate hikes, etc. Hawkish language would be JPow hinting at even larger rate hikes to come.
So how to trade this?
Based on the charts that Beaker showed, it looks like there are immediate green candles at the time of the rate hike itself, so I would go calls maybe in the 3 to 10 minutes leading up to 2 PM EST depending on how the price action is at the time.
If 75 bp hike → take profit on the calls in that first minute or 2 of green (similar to an FOMC minutes play) and just wait until Jpow conference and trade the market reaction to the conference.
If 100 bp hike → be more urgent about closing the calls because the market is probably going down. Recall that the !fedrate shows 19% probability for that 100 bps hike, which means it is 81% not priced in. Switch over to puts. I would guess that the market should generally trend down towards the conference. Then gauge the market reaction to the conference.
One thing to keep in mind is the FED will release the 2025 summary of economic projections (SEP). People will be playing close attention to what they show the Federal funds rate to be.
For 2022 - Above 3.9 is bearish. Below is bullish
For 2023 - Above 4.6 is bearish. Below 4.4 will be bullish
For 2025 - Above 4 is bearish. Below 3.9 will be bullish.
We need to see the FED tell us that they will be lowering interest rates in the SEP at some point in 2024.
Also watch for the unemployment projections. Unfortunately, the higher the better. Would like to see around 5% for the bull case.
GDP projections coming in soft will be a good indicator as well.
