The worsening of financial conditions this year led markets to price in rates to remain unchanged at the January FOMC meeting, with many speculating the Fed to deliver a dovish statement. This has now been realised. Language used described that the FOMC recognised that economic activity had slowed and that inflationary pressures and expectations had declined further. As a result, it will now take an improvement in financial market conditions for the Fed to hike again at their next meeting, which is in March.

Markets are currently only pricing in a 25% probability of a hike in March. Yet, the Fed has indicated that their March meeting will hold a rate increase if conditions recover. This means that markets believe there is only a quarter chance of the market and economic situation improving. We agree with this for the key reason that there is unlikely to be a catalyst to improve conditions enough over the next two months.

Potential Positive Catalysts

The payrolls print at the beginning of January was particularly strong, showing upward revisions for the previous two months and brining the three months average up to 284,000 new jobs a month. However, markets failed to react positively to this data. The continued risk off tone despite employment strength indicates that markets believe other factors are much more important in the current economic climate. This means that future payrolls prints are also unlikely to have a positive effect.

Although employment data may not have the potential to be a catalyst for better conditions, growth may. However, the next GDP report, released this Friday, is expected to show soft economic performance. Meaning that growth as a whole is unlikely to have a positive effect over the coming months. 

Considering inflation, there is little to be optimistic about. Oil continues to stay close to the lows while other commodities, such as copper, also show weakness. These factors unlikely to drive costs higher, and the lack of expansion in the oil industry flows over to other support sectors, such as the industrials. Collectively the inflationary pressures from these factors are unlikely to improve.