With a 25bps Fed rate cut almost fully priced in by markets, pre-positioning in equities, bonds, and short interest remains subdued. Historical FOMC-day volatility has also moderated, reflecting minimal risk around the decision. However, mixed signals across SPY, QQQ, and bond ETFs suggest broader market dynamics are now independent of FOMC expectations. It may be that the 25bps cut is already fully priced in, leading to no significant positioning.

One survey indicates the odds of a 25bps cut at 96%, with the odds of no cut at 4%, and the odds of a 50bps cut at 0%. The CME FedWatch tool, based on futures, shows a 91% probability, up from 71% before the jobs report a week ago, and now stands at 95%.

With minimal risk regarding the number, pre-positioning in the stock and short markets is lower

There are only a few data points after CPI before the FOMC meeting.

Unlike previous instances, there are no clear patterns in the bonds, where we had seen yield curve positioning before.

TLT short interest is down less than 1%, while IEF is up less than 2%. This is bullish for TLT and bearish for IEF, which may indicate a flattening of the long end of the curve. However, the magnitude of this shift is much smaller than before.

The SPY and QQQ are also sending mixed signals.

SPY short interest is down 3.5%, with the stock stuck below its all-time highs. The short positions are bullish, but the stock is not, creating a mixed picture.

Conversely, QQQ short interest is 2% higher, with the stock also up 2%, suggesting a momentum strategy. This, too, is a mixed signal.

Bonds show no clear trend, and equities are sending mixed signals: SPY and QQQ are moving in opposite directions, despite being highly correlated.

For example, S&P 1-day options are pricing in a move of around 1.1%, compared to an average actual move of 2% on an FOMC day, while TLT is only pricing in a 1% move. These are larger-than-average moves based on recent history, but smaller than typical FOMC-day moves in the past.

Historically, FOMC days are 60% more volatile than regular days. However, since recent regular-day moves have been only about half a percent, the forecast for FOMC-day volatility is now just 1%. The lower forecast is also a result of recent low volatility.

The market is essentially signaling that the 25bps cut is a done deal, and in some sense, the year is over. These instruments are trading on their own merits, rather than being driven by the FOMC.

This accounts for the mixed pictures not reflecting FOMC but their own risks.

Markets signal a muted response to the upcoming Fed decision, reflecting broader dynamics beyond policy-driven volatility. Contact us to uncover how these shifts may impact your portfolio strategies.

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