Asia wrap: Room for hawks to fly

With the markets so bearishly positioned, there’s a chance stocks could surge higher on Wednesday if the Fed sticks to their steady state, more so if investors are prepared to engage in a "buy-the-fact" dynamic when Powell takes center stage.

In the past six months, the market sentiment regarding rate cuts has undergone significant fluctuations, shifting from pricing in multiple cuts to just one, despite minimal changes in hard data on inflation and growth. Traders seem to be placing massive bets on minor fluctuations in decimal points of inflation numbers, leading to huge swings in rate-cut expectations.

While some argue that these shifts in expectations are based on perceived progress or lack thereof in disinflation, it's hard to believe that traders were so certain about the disinflation trajectory in January, only to drastically revise their forecasts just a few months later.

A more plausible explanation is that huge risk-taking funds are essentially engaging in a very high-stakes speculative game of poker, betting large on how policymakers will interpret and react to economic data, down to the minutest details. The upcoming Fed meeting may provide clarity on whether hedge funds' huge bond shorts, with commodity trading advisors joining the fray and now sitting at near "max short duration," are correct in their high-risk game of chance.

While risks around the Fed's mandate may appear more balanced now compared to the peak of the inflation scare, recent core price growth readings emphasize that inflation remains a primary concern, overshadowing worries about other economic indicators, so there is room for hawks to fly.