How the markets could react to the Fed meeting

Mar 20, 2024 at 4:32 pm GMT- Achilleas Georgolopoulos

• Fed meeting coming up next; the market is in waiting mode

• The 10-year US Treasury yield usually reacts first to Fed decisions

• Gold and EURUSD could benefit from lower US yields

The much talked about Fed meeting is taking place tonight at 18.00 GMT with the usual press conference held 30 minutes later. There is a growing debate about the outcome of the meeting, the overall rhetoric by Chairman Powell and the famous dot plot. There are some voices in the market talking about a purely dovish meeting, essentially opening the door to a June rate cut, but the Fed does not like to surprise the market.

A quick look at short-term correlations

Putting aside the meeting's details, it is worth having a quick look at the current 3-month correlations of the key market assets. The S&P500 index, the 10-year US Treasury yield, euro/dollar, WTI and Gold have been under the microscope with the results presented in Table 1 below. In addition, the short-term correlations at each Fed meeting since the July 26, 2023 gathering are also displayed, to give our readers a sense of the correlations' changes taking place over the past few months.

Correlation measures the relationship between the movements of two assets. If this relationship is positive, then the two assets tend to move in the same direction. On the flip side, if correlation is negative then these assets usually move in the opposite direction.

Before going through the findings, the 10-year US yield has been selected as the starting point for the analysis. Understandably, this is the first security to react to Fed decisions, sending shockwaves across the remaining asset classes.

10-year US yield vs. Gold and euro/dollar 

Table 1 shows that there is a strong negative correlation in the both 10-year US yield-Gold and the 10-year US yield-euro/dollar pairs. This means that should the Fed appear more dovish than anticipated pushing yields towards the 4% threshold, both gold and euro/dollar are likely to strongly benefit.

While the former confirms the long-term relationship between US yields and Gold, the latter is a bit odd since the long-term tendency between the 10-year US yield-and euro/dollar tends to be much weaker than currently calculated. It is worth noting that these short-term correlations have not changed much since July 2023.

10-year US yield vs. S&P 500 index

More interestingly, there is a traditional positive tendency between the S&P 500 index and the 10-year US yield. Put it plainly, higher equities prices tend to occur when yields are marching higher, for example on the back of a stronger economy. However, the current 3-month correlation is negative and has been so since the September 2023 Fed gathering. This could mean that the bond market is probably not fully endorsing the recent aggressive rally in US equities.

If the Fed chooses to appear more dovish at Wednesday’s meeting, equities could get another boost and possibly overcome the current sideways trading. Naturally, a positive reaction by the main stock indices could have a positive spillover effect on both gold and euro/dollar.

Negative correlation between the S&P500 and oil prices

Finally, WTI prices have recently been on the rise and close to a new 4-month high. There appears to be a negative correlation between the S&P500 and oil prices. This could be counterintuitive considering that equities rally on the back of a bright economic outlook which should, on principle, boost oil prices. However, one could argue that elevated oil prices are a tax on economic growth as seen in 2022 on the back of the unfolding Ukraine-Russia conflict.