Good morning investors,
The Federal Reserve announces its rate decision this afternoon, and everyone knows the outcome will likely be that rates will remain unchanged in the 3.5% to 3.75% range. Markets are pricing near zero probability of a cut at this meeting or any other in the near future. Futures suggest policymakers will not consider easing until at least September, more likely October, and even then just a single cut this year.
What makes today's meeting unusual is the limited time that whatever guidance emerges is relevant for. Jerome Powell's term ends in May. Kevin Warsh, the nominee set to replace him, sees the world quite differently. He believes AI is structurally disinflationary, that the Fed's balance sheet must shrink, and that the current policy framework needs updating.
That means the dot plot released today will be a less reliable roadmap than what it has been in the past. Investors should not mistake it as a forecast that will set policy come May. The contents may move markets in the near term, but the regime change approaching makes any long-term extrapolation questionable.
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Opening Bell
Futures are trading higher this morning as crude prices have dipped. Dow ($DIA ( ▼ 0.03% )) futures have added 240 points or 0.5%, S&P 500 ($SPY ( ▼ 0.23% )) futures have climbed 0.5%, and Nasdaq 100 ($QQQ ( ▼ 0.65% )) futures have advanced 0.7%.
Oil is providing some relief. WTI futures are down 1.5% and Brent has fallen marginally. The moves come a day after major averages shrugged off a rise in crude. The Dow, S&P 500, and Nasdaq each closed higher on Tuesday despite President Trump posting on Truth Social that the US does not need help from NATO allies in the Middle East.
Producer price index data for February arrives this morning, with consensus expecting a 0.3% increase. Factory orders data is also due. Micron Technology reports after the close and will be closely watched given soaring demand for high-bandwidth memory. The stock has rallied nearly 62% this year.
The Fed's Impossible Balancing Act
Powell and his colleagues must navigate a mix of complicated and conflicting forces. The Iran-fueled oil shock gives the Fed more reason to hold on account of inflationary pressures, yet the labor market continues to deteriorate. Those pressures will not change with the Fed chair.
I expect a fairly hawkish tone today. The committee will likely hold rates, acknowledge they are monitoring inflation spikes from the conflict, and emphasize remaining data dependent. Any hints Powell drops about the path of future rates will be scrutinized, though markets may be wary of reading too much into the outgoing chair's statements.
Former Fed Vice Chair Roger Ferguson said he expects the committee to be circumspect in characterizing inflation, unemployment, economic growth, and the expected policy path. He noted he is more worried about higher inflation than labor market weakness per CNBC. The Fed has been away from its 2% target for multiple years now. At some point, questions will emerge about whether that target remains credible.
Investors will get a deeper look into committee thinking when the Summary of Economic Projections is released. Most observers expect few changes. The Fed could nudge up growth and inflation projections slightly from December, but the rate outlook is expected to remain largely intact. Officials indicated one cut this year in December, and that consensus is likely to hold.
Warsh: A Different Kind of Fed Chair
Kevin Warsh carries a more hawkish track record than most presumed doves. During his first stint as a Fed governor, he advocated for tighter policy and later resigned over concerns about the central bank's growing footprint.
That said, his recent alignment with President Trump's call for lower rates may reflect both a genuine ideological shift and instincts for securing the top job. Either way, Warsh will inherit a complicated economic situation that does not lend itself to easy policy choices.
His nomination remains held up by the Justice Department's case against Powell over the Fed's headquarters renovation. Senator Thom Tillis has said he will block the nomination in the Senate Banking Committee until that is resolved. If no replacement is confirmed before Powell's term ends May 15, Powell stays, and President Trump will not be pleased.
Hedge Funds Getting Battered
Hedge funds are experiencing their worst drawdowns since Liberation Day as the Iran conflict unravels crowded trades. Rapid shifts in equities, currencies, and commodities have forced investors to unwind positions across global markets. The selloff marks a rare moment when traditional diversification within the hedge fund universe has offered little protection.
In the run up to the conflict, many funds had built exposure to global growth, including overweight positions in equities and emerging markets alongside bets against the US dollar. Those trades are now unwinding quickly.
Long/short equity funds have been hit hardest, falling about 3.4% in March compared to roughly 2.2% for the industry overall. More surprisingly, strategies typically seen as beneficiaries of volatility have also struggled. Global macro is down 3% and CTAs are similarly underwater.
This oil shock is behaving differently from past cycles. Normally, higher crude prices increase revenues for oil-exporting nations, and some of that money gets recycled into global markets. This time, shipping disruptions are interrupting those flows, reducing the money flowing back into financial markets.
Here are overall asset class returns year to date:
Macy's: Resilient Consumer, Cautious Outlook
Macy's beat quarterly sales and profit expectations but offered cautious guidance for the year ahead, citing the same uncertainties affecting everyone's planning. CEO Tony Spring ticked through the questions: Where will gas prices be? How long will the Middle East conflict continue? Will tariffs be refunded or raised? Will the resilient consumer persist?
For the fiscal year, Macy's expects sales between $21.4 billion and $21.65 billion with adjusted earnings of $1.90 to $2.10 per share. The earnings guidance came in shy of the $2.17 consensus. The company expects larger tariff impacts in the first half of the year, with the first quarter having the most meaningful effect.
The underlying story is more encouraging. All three brands grew in the fiscal year and holiday quarter. For the first time in three years, the namesake Macy's banner returned to positive comparable sales growth. The 125 stores where the company has increased investment are outperforming the rest of the chain.
Spring said shoppers have shown continued resiliency in recent weeks, spending on fresh clothing and gravitating toward newer brands and trendier items. The transformation strategy appears to be working, even if the macro environment demands prudent guidance.
Amazon Pulling Back From USPS
Amazon plans to sharply cut the number of packages it sends through the US Postal Service after failing to agree on business terms. The e-commerce giant, widely considered the Postal Service's biggest customer, aims to reduce postal shipments by at least two-thirds by September when its contract ends.
The company has been building out its own delivery network for years. This move accelerates that transition while creating additional financial pressure on the Postal Service, which has already been soliciting proposals for access to its last-mile delivery network.
Nvidia Gets Beijing Approval
Nvidia has won Beijing's approval to sell its second-most powerful AI chips to China and is also preparing a version of the Groq AI chip for the Chinese market. The long-awaited regulatory approval paves the way for the chipmaker to resume sales of H200 chips, which have been a major flashpoint in US-China relations.
Despite strong demand from Chinese firms and US export approval, Beijing's hesitation to allow imports had been the main barrier. CEO Jensen Huang said Nvidia has been licensed for many customers in China and has received purchase orders from many companies, allowing production of the chip to resume.
This opens a market that once generated 13% of Nvidia's total revenue. Combined with the $1 trillion demand visibility Huang outlined at GTC, the fundamental picture for Nvidia continues strengthening even as the stock has pulled back with the broader market.
Mortgage Rates Jump
Mortgage rates last week jumped to the highest level since year-end, reaching 6.30% on a 30-year fixed. The move caused refinance applications to plunge 19% week-over-week as the market gave back the gains seen earlier this year when rates were declining.
Rising Treasury yields driven by the Middle East conflict and elevated oil prices are the culprits, along with the risk of a broader inflationary shock. This adds another headwind for housing, which was just beginning to show signs of thawing after years of frozen activity.
Final Thought
Today's Fed meeting matters less than usual because of the leadership transition approaching. Whatever guidance emerges has a 60-day shelf life at best. Warsh will bring a different framework to monetary policy, and the economic situation he inherits will demand fresh thinking regardless of what the current dot plot shows.
The healthy earnings backdrop continues lending fundamental support for equities. Solid economic foundations, more reasonable valuations after the recent pullback, and strong corporate fundamentals are providing a floor beneath the market even as geopolitical uncertainty remains elevated.
Hedge funds are getting washed out of crowded positions. Sentiment indicators remain at extreme fear levels. The technical setup continues showing oversold conditions. When positioning gets this bearish and the market this washed out, the asymmetry favors patience.
The conflict with Iran will end. Oil prices will normalize. The Fed will eventually cut rates. The only question is timing. Long-term investors who maintain discipline through the current uncertainty will be rewarded when the fog clears.
As always, feel free to reach out with questions about navigating this environment.
Best regards,
Dan Sheehan [email protected]
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This newsletter is for informational purposes only and should not be considered as investment advice. Please consult with your financial advisor about your specific situation.