EM FX weekly EM FX weekly EM FX weekly

Macro Digest: Taking profits as Fed falters

Macro 6 minutes to read
Picture of Steen Jakobsen
Steen Jakobsen

Chief Investment Officer

Summary:  The macro slowdown is no longer 'incoming', it's here. Not only that, but the Federal Reserve is seriously behind the curve, and appears to operating in a state of deep denial.

Action: Take profit on the long NASDAQ from earlier this week (7,300 versus 7,014).  Our new position is neutral

Why it matters: The slowdown in macroeconomic data is now no longer “incoming” – it’s here now, in the present tense, and this means that the “buy the dip, courtesy of the Federal Reserve“ risk narrative is no longer sufficient. The Fed is seriously behind the curve, and it's in deep denial as well.

Context: If the market is simply pricing in an adjustment to lower rates, then investors should and will buy the market. This only confirms that the Fed is cutting rates by June. If the market gets the feeling, however, that the Fed is behind the curve and we are at risk of an actual recession, then this is a major sell signal.

The math: Assume a 50% probability of recession during Q3 or Q4; the average drop from peak to trough is 50% in recession. Further assume that there is 20% upside for the balance of this year.

Given these figures, weighted risk is as follows:

Upside: 10% expected return (50% * 20%)
Downside: 25% expected negative return (50% * 50%)

More simply, we see 10% in upside potential with a negative 25% risk at present. It's not a great risk/reward ratio.
Chicago Fed national activity
National activity has gone deeply into the negative...
We continue to be surprised by just how deeply the Fed has buried its head in the sand. New York Fed President Williams is the second-most important vote on the Federal Reserve board and he stated yesterday that the outlook for the US economy remains solid while acknowledging that risks are rising and that investors expect the central bank to lower interest rates in response:

“My baseline is a very good one but at the same time we obviously, as always, need to be prepared to adjust our views,” said Williams, answering questions from a moderator and the audience following a speech in New York on Thursday.
NY Fed President John Williams
Williams then made a bad situation worse with the below statement; the only phrase that comes to mind here is 'willful ignorance'.
Recession and inversion


The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15

Contact Saxo

Select region


Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.