Bottom-line: Net, the setup into the Fed suggests risk assets are over-extended (with limited upside) while rates are priced relatively fair (and offer better risk/reward)
- Monetary Policy Updates: The Fed will not hike for the first time this hiking cycle but will convey that at least one more hike is in store by raising the dot plot by 25bps
- June FOMC Scenarios: We have a 55% chance for our base-case (hawkish skip) vs a neutral skip (35% prob) versus A dovish skip or A hawkish twist (5% prob each)
- Market Implications: rates are priced to a hawkish skip outcome while stocks are viewing a skip as the time to load up on risk, both cannot be right (in our view)
- In our cross market analysis part 1: 5s30s curve flattened too quickly, 5s look attractive and/or curve is too flat.
- In our cross market analysis part 2: We highlight the big outlier this time is the massive HY tightening & SPX rally.
- In our cross market analysis part 3: We explore current market pricing vs activity during the last hike of prior cycles.