How to spend time before important indicators【Shun Nakahara's Today's Remark】Updated July 27

How to Spend Before Important Indicators

―Considering Market Action After the FOMC―

This week will release many important indicators, but the main focus will no doubt be the FOMC statement in the late night of the 27th (3:00 a.m. on the 28th) and Chair Powell's press conference afterward. Before that, there will be a lineup of important indicators such as housing-related data, durable goods orders, and Consumer Confidence, but unless there are strong surprises, the market will undoubtedly be watching closely for how the Fed perceives the current situation and whether there is a mismatch with the market.

The consensus is for a 0.75% rate hike, with a stance on inflation that remains resolute about rising prices, but with comments that may show some consideration for the economy, or pessimistic remarks about the economy’s outlook. In particular, if the 0.75% hike is described by Chair Powell as “unprecedented,” and if that signals that future hikes will slow to a pace of 0.5% or even 0.25%, it would be a windfall for the market. In other words, bonds would rise, stocks would be bought, the dollar would fall, and commodities—especially oil and wheat—would soften.

The problem is that such consensus is being priced in by fast-moving speculative traders. In other words, even if it goes as expected, there is a real possibility that it could move against expectations in the very short term. In other words, even if the FOMC acts as expected and Powell’s remarks are perceived as somewhat dovish, there is a chance that prices could reverse for 15 minutes to several days.

Nevertheless, it is unlikely that stocks will simply fall and consumption rise. There are huge “risk hedges” built up by institutional investors and hedge funds by mid-June. Their positions can be described as a “tragic scenario” or a “stagflation” position. Long positions in commodities like crude oil, long positions in the dollar, short positions in stocks (especially growth stocks and the Nikkei average), short positions in bonds, and long cash. But while individually correct, collectively it is a losing configuration. In a “tragic scenario” bonds would typically be bought, and in a stagflation scenario holding cash would be nonsensical. Their positions are a classic example of the fallacy of composition, and even if the outlook is correct, some part of these positions will be hurt significantly.

At present, this “risk hedge position,” which looks like a global economic collapse scenario, has not been doing well since July. And how much confidence do managers have in this position now, given it was built by mid-June? Even if there is confidence in the position, if the markets move too far against it, reducing the position becomes quite possible.

In other words, even if short-term traders reduce long positions in bonds and shorts in the dollar because things are “as expected,” if this gigantic “risk hedge position” unwinds even partially, the market will soon revert to its previous state.

Moreover, the author’s scenario suggests that in the short term the positions will unwind to a certain extent due to inflation easing and recession risk, but the path is still unfinished. It will be interesting to see whether the price movements align with the author’s view, and to watch the market dynamics after the 28th to see how supply and demand evolve again.