Traders Make Same Bet That's Burned Them Before

Tatiana Darie is a Bloomberg Markets Live reporter, strategist and journalist.

Wall Street traders are betting that the Federal Reserve is going to reverse its course and stop the fastest rate hike cycle in history. This could already be happening. This is a bet that has failed them in the past.

The stock market took a turn for the better in November, posting its longest daily streak in almost two years. Traders grew more confident that a slowing job market would pave way for interest rate cuts earlier than expected next year and deeper than official projections.

The ugly bond auction on Thursday spoiled the party, and the bets that the central bank would pivot have been scaled back since Fed Chair Powell stated the central bank will not hesitate to tighten further if necessary.

If the recent trend is anything to go by, there will be more losses.

This is not the first instance that traders have positioned themselves prematurely for a Fed dovish shift that later turned out to be a figment in investors' minds. This time is no different. Policymakers have confirmed that despite a notable cooling of inflation, core inflation is still sticky and the price growth rate remains above target.

Recall the times in which markets have reacted similarly.

Deutsche Bank tallied at least six times during this hike cycle when markets had positioned themselves for a Fed shift, only to have their hopes dashed.

The so-called "pivot" has evolved over time from what was initially described as a small amount of tightening to slower hikes and then betting on a break.

It's difficult to isolate the drivers of the stock markets, since fundamentals and sentiment are important. If one looks at equity movements around rallies based on the hopes that the dovish shift described by Deutsche Bank,

In the weeks following, the S&P 500 fell by an average of 9%

If you look at the highs and lows of these rallies, then it is possible to see that they are not as strong.

The Fed may have to tighten financial conditions again as some policymakers have suggested.

Central bankers have said that talking about rate reductions is premature. Fed speakers acknowledged softness on the labor market, but Chicago Fed President Austan G. Goolsbee pointed out that this is 'what you would want - what you expect'.

The unemployment rate is now 3.9% which is higher than the Fed's forecasts for the year. This creates some risks. As MLIV's Simon White argued, however, the unemployment claims data and WARN data are leading indicators that indicate the labor market is not yet slowing down.

While inflation is not far off the Fed's forecasts for this coming year, it still falls short of the long-term target of 2% set by the central bank. When comparing the CPI, PCE, and their core equivalents for both six-months and three-months annualized rates, it is clear that momentum has stopped.

Investors can hang their hats on some signs that the job market is softening

"The doves have everything they need to put the hawks into a casket

Neil Dutta, from Renaissance Macro, said this on Bloomberg Television.

The Fed's projections suggest that markets should be prepared for more slack on the labor market and in the economy, as well as for the Fed to accept it until they reach their inflation target.