The bond market stays in focus in run as much as the Fed tomorrow

That is one of the key charts to watch in markets at the moment. 2-year yields remain heavy close to the 3.55% mark but bond players will have to wait for vindication from the Fed tomorrow still. Besides that, 10-year yields are seen around 3.62% at roughly its lowest levels this year currently.

In FX, USD/JPY also flirted with a firm break of 140.00 on the daily chart yesterday but that held at the close. The pair is now back to around 140.55 but sellers remain in control and the pressure is keeping up. That especially with yields staying heavy.

So, what is all this saying about market expectations going into the Fed tomorrow?

There is a leaning or at least a sense that traders are trying to bully the Fed into a decision again. It wouldn’t be the first time and considering the Fed’s lack of cojones, it won’t be the last either. The question now is, will the Fed fold and go with 50 bps? Or will they stick to their guns with a 25 bps move?

I was quite sure of the latter last week but now, I’m quite sympathetic to the idea of the former as well. Market pricing for that has jumped even higher in the past day to ~69% now. There is scope for disappointment and it’s now a question of whether the Fed is willing to upset traders as such.

On the flip side, going with 50 bps means that they’ve just walked back on everything they tried to sell since Jackson Hole. It would be a bit of a credibility hit as it might suggest some “panic”. Even if it won’t be the case, traders might still take it as policymakers being afraid that things are actually worse than what the data might be saying. Cue even more “panic” then.

So, therein lies a potential risk if they do give in and go with 50 bps tomorrow. If the Fed didn’t have a history of being bullied into decisions, it would be quite assuring to know that they will move by 25 bps. Unfortunately, we all know that their record has been blemished in the past. Fool me once, shame on you. Fool me twice, shame on me.