The last Federal Open Market Committee did not have major updates on the outlook of the economy. No major changes on the forecasts on the economic growth or outlook, and no major changes on the future trajectory of the interest rates. The only change in tone was related to the inflation outlook. FOMC hinted that they would be willing to stay in a wait and see mode until the inflation outlook gets clearer. The FED chair Jerome Powell also added that they would look for a persistent under-delivery of inflation relative to its target to increase interest rates and the current level of interest rates he added, was in line with the current outlook of the economy.
FOMC has been on a cautious note this year. 2-year rates of the US government treasuries have been decreasing since October and it is getting harder and harder to understand if we are heading to a recession or another low inflation-good growth goldilocks scenario. The reaction of the overall market to these developments might also have been confusing for some of the market participants.
Understanding the positioning build-up before crucial events like FOMC meetings, might help investors to make better judgments. Dependent on the outcome of the event, portfolio managers running momentum strategies might look for asset classes that have seen excessive positioning before the event and take advantage of this information to generate alpha. Using EPFR flow data, Figure 1 shows the pre-FOMC weekly flows to 11 different asset classes, namely: Asia-Ex Japan, Emerging Markets, Europe, US, UK, Japan equities and EM Hard Currency, EM Local Currency, US High Yield, US Investment Grade, US Treasury bonds.
Including the last FOMC meeting, European equities had consistently seen the biggest outflows across our asset class universe in the last 3 FOMC weeks. Additionally, before the same last 3 meetings, EM Hard Currency bonds, US High Yield and EM local currency bonds saw consistent inflows. More interestingly, in the last 11 FOMC meetings, we saw only two instances that US treasuries received outflows.
Statistics of these sort, generated using EPFR data, can help investors to identify price distortions by quantifying and monitoring excessive or light positioning during significant events.
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