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Bullish Signals: Inside the Fed’s role in the latest RiskOn sentiment wave

May 16, 2024 | Sentiment overview

The current RiskOn wave of market sentiment  kicked off on May 2nd and ended previous RiskOff wave. Let’s see some details of it.

The initial spark was a press conference by the Fed Chairman following the FOMC’s decision to keep interest rates unchanged the previous day (May 1st). He reassured the markets by stating that another rate hike was unlikely and confirmed a reduction in the pace of quantitative tightening (QT). Then Apple reported satisfactory enough numbers for Q1 (on May 2nd) and NFP readings on May 3rd forged the solid beginning of current RiskOn wave of market sentiment.

Throughout its duration, the RiskOn wave haven’t yet surpassed the long-term average level—remaining below the expansion threshold, which typically signals a stronger bullish rally. Despite this, RiskOn sentiment stayed relatively stable in RiskOn territory during the week of May 6th to May 10th.  Several factors contributed to this stability. On May 3rd, the RiskOn wave received a significant boost from the long-awaited data on the cooling labor market. The number of new private-sector jobs, excluding agriculture, dropped substantially, not only compared to the previous month but also against expectations. Therefore, the May 3rd NFP report became the fourth most impactful breaking news of the year.

Such boosts significantly elevate the Moodix index, allowing the market and sentiment to absorb a series of moderately negative news without causing a correction or a sharp deterioration in sentiment. The market easily digested negatives like the ISM PMI Prices on May 3rd and less-than-optimistic comments on inflation from Fed’s Goolsbee.

The RiskOn waves of sentiment in general are characterized by lower market volatility and subdued reactions to breaking news—the market is simply “at ease.” During the week from May 6th – May 10th, the market’s calm was bolstered by the absence of major negative news and the “holiday” volatility due to a largely empty macro calendar and some bank holidays in part of EU. Furthermore, the market participants were naturally more cautious ahead of the key macro release, the U.S. CPI.

On Friday, May 10th, the market absorbed another dose of negativity with poor inflation expectations (UOM 1/5-year inflation exp). Surprisingly, it avoided a significant downturn or a sentiment dip from the U.S. PPI data released on May 14th, just before the U.S. CPI.

It’s worth noting that the market received another boost from the Fed Chairman, who, in a moderated discussion with Klaas Knot in Amsterdam, stated that the U.S. PPI results were “mixed” and expressed strong confidence in falling inflation, the trajectory towards the 2% target, and the strength of the U.S. economy.

The April U.S. CPI results on May 15th provided the market with a substantial dose of positive sentiment and bullish energy, suggesting that the RiskOn wave is likely to continue for some time. Stay tuned for the next Sentiment Overview, a new feature from the moodix market editorial team.

A reminder – you can always watch waves of mood and the market sentiment development live in moodix web app that you can check for free in 7-days free trial.

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