The 'single most important' trade in 2018 could be a tug of war between the Fed and the market

As equity markets in the U.S. look to cap off a stunning year full of record winning streaks, all-time highs and strong returns across multiple asset classes, investors are left wondering: What will 2018 hold?

The "single most important" trade for the market next year will lie not in the stock market, but rather in Fed funds futures, said Boris Schlossberg, managing director of foreign exchange strategy at BK Asset Management.

The strategist told CNBC's "Trading Nation" on Wednesday that the apparent divergence between the Federal Reserve's expectations for interest rates' direction and the market's expectations for its tightening path will be of the utmost importance as 2018 unfolds. Here is his explanation.

• The most important thing in 2018 will be watching the spread between the central bank's so-called dot plot of Fed officials' expectations for interest rates, and the expectations as reflected in the Fed funds futures rate.

• This is essentially the difference between where the Fed thinks interest rates are going to go versus where the market thinks rates are going to go. Right now, the disparity is significant.

• The Fed is forecasting, according to its own dot plot, around three more rate hikes next year, taking the benchmark rate to between 2.5 and 2.75 percent, approximately. This comes as the market itself is much more cautious about, or "not buying," the Fed's projections.

• The Fed funds futures are pricing in a less hawkish outlook. If the central bank's dot plot is right, bond yields will tick high, the dollar's relative strength will gain and stocks could suffer. Meanwhile, if the market is correct, and rates may not rise as much as the Fed projects, the dollar will wallow and bond yields will remain muted, thus buoying stocks.

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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