Most traders don't expect to glean any significant market-moving insights from the Federal Reserve's policy statement due Wednesday afternoon. But those traders risk getting caught unawares by a less-dovish-than-expected Fed, says George Goncalves, head of U.S. rates strategy at Nomura.
Referring to the Fed statement, Goncalves wrote in a Tuesday afternoon note to clients that "given market positioning and pricing, the risk is that if it sounds less dovish (or even neutral) the market will be offside."
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In addition, Goncalves notes the risk that the Fed strikes a more optimistic tone about the economy, after the central bank wrote in its March statement that "economic growth has moderated somewhat."
"If it were to attribute the weakness in the economy as being backward looking, watch out!"
In other words, the statement could clarify that the Fed's thoughts on the economy moderating was an observation about the past, not a prognostication about the future. If the Fed is more optimistic about growth, that would give the central bank a reason to think about normalizing monetary policy sooner rather than later.
Either way, it will be interesting to see how the Fed reacts to Wednesday's surprisingly weak gross domestic product number, which showed the economy growing just 0.2 (annualized) in the first quarter.
Finally, while the Fed will not release an update of its Rorschachian "dot plot" forecasts, Goncalves notes the additional risk that the Fed updates its "Policy Normalization Principles and Plans" document for the first time since September in order to better explain what policy normalization will look like.
"If that were to come out as well, that could be a sign that, hey look, they really mean business, they want to hike sometime this year," Goncalves said Tuesday on CNBC's "Futures Now."
In sum, given that so many traders expect a mild Fed statement and are consequently buying short-term Treasury bonds "the risk is actually to the downside" for fixed income, Goncalves said.
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