Macro Digest: Watch financial conditions for timing next Fed action Macro Digest: Watch financial conditions for timing next Fed action Macro Digest: Watch financial conditions for timing next Fed action

Macro Digest: Watch financial conditions for timing next Fed action

Steen Jakobsen

Chief Investment Officer

Summary:  Equity and bond markets both sold off yesterday after Powell failed to provide any hint of any incoming Fed put. Rest assured, the Fed will eventually have to act, but will likely do so only once financial conditions have deteriorated sufficiently to force its hand. Today we look at the market developments that will indicate the Fed is finally set to send in the cavalry once again.

What: Powell and FED is being pushed by market – this is analysis  of WHEN has financial condition tighten too much?
Answer: another 1 standard deviation decline in financial conditions
Action: Await Fed signal (and begin to position once the Answer is triggered)
Trends: EURUSD had broken lower, another layer of Gold support broken, US yields testing YTD highs

Yesterday, I wrote that it is far too early for the Fed to act on yield curve control, a message the market was clearly not prepared to hear, as equities and treasuries sold off heavily when Fed Chair Powell essentially shrugged off the recent rise in treasury yields as only something that “caught his attention”. It should not have been such a surprise, as Powell is following the script that the Fed has to follow – that it will only act due to financial market considerations on a material decline in financial conditions, one sufficiently large to threaten the fulfilment of their dual inflation/employment mandate.

The most interesting set of comments yesterday from Chairman Powell on WSJ webinar were these:

“I would be concerned by disorderly conditions in markets or a persistent tightening in financial conditions that threatens the achievement of our goals,” Mr. Powell said Thursday. He added that the Fed is looking at “a broad range of financial conditions,” rather than a single measure.

This makes clear that Fed policy will be driven by Financial Conditions – and Bloomberg has a useful measure of US financial conditions, shown below. As the graphic shows, conditions are still positive and would have to decline about 1 standard deviation to about -0.50 from the current 0.40 to get to their worst levels since recovering from the pandemic reaction last spring. That level was just before the US election, by the way.

Source: Bloomberg

To anticipate potential moves in this index – you can align the factors in the list by volatility – of course the stock market has the “fastest speed (volatility)) – meaning a very large move in the stock market could force the financial conditions index into territory where the Fed will intervene.

Below I have made a basic chart of Bloomberg Financial Conditions with panel including Z-score (21 days – or about one month) and the Nasdaq 100 measured by the same one-month rate-of-change (ROC)… in order to gauge the speed of the move up or down.

Source: Bloomberg

I may be “stretching” the argument and correlation here, but clearly – a cross-over move can be defined in this chart, meaning we are within a standard deviation of seeing the next action from the Fed – whether from a sufficiently large further correction in equity market and especially if credit spreads (still showing no strain) becomes unanchored.

What will the next Fed action be? Most likely an addressing the turmoil in repo and funding markets caused by the US Treasury drawing down the majority of the $1.6 trillion in its General Account at the Fed. But remember: this is merely short-term noise bigger story: We have had a major paradigm shift from a focus on financial stability to a focus on social stability, a move which changes everything, including potentially the velocity of money, inflation outlook and growth. The next level in the 10-year US treasury yield is 1.65%, and then there is some mortgage convexity hedging between 1.7-1.8%, which could lead to 1.90/1.95%, which is way above my earlier trend channel (see below).

Source: Bloomberg

My medium term channel was established mid-January..

Safe travels and nice week end

Steen Jakobsen

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 07

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article
  • The rise of populism: Far-right parties will influence the future

    The disheartening cycle of unresolved geopolitical conflicts, the rise of polarizing political parties, and the stagnation of productivity.

    Read article
  • Investing in China: Navigating Q1 amid economic challenges

    Understand China's political landscape in Q4 2023 and the impact on counter-cyclical initiatives, with a focus on the pivotal Q1 2024.

    Read article

The Saxo 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 is not intended to and does not change or expand on this. 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 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 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 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 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 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 (
- Full disclaimer (

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.