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Here's how I'm trading the big Fed decision: veteran derivatives trader

In this article:
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John Netto, author of "The Global Macro Edge," joins Yahoo Finance's Jared Blikre for a discussion about the Federal Open Market Committee meeting decision and press event by Federal Reserve chair Jerome Powell.

Video Transcript

JARED BLIKRE: Welcome back to Yahoo Finance Live. Market activity not too volatile today, but we just saw the NASDAQ 100 touch session lows, down about 100%. But it's merely the calm before the storm. This week will be filled with plenty of activity, including a slew of earnings headlines by the biggest names in tech and a Fed decision where investors and Americans will be closely monitoring what Fed Chair Jerome Powell has to say on Wednesday.

Joining us now is John Netto, author of "The Global Macro Edge." And John, we're going to get to your big book in a second. There's a whole story there. But I want to get your take on the markets, especially ahead of the Fed. You had some interesting things to say this morning when we met down at the New York Stock Exchange.

JOHN NETTO: Sure, so a lot of what comes in to these Fed decisions is what the market's positioned for. And if we look at what Fed funds futures have done, if we look at the market rally, it is down a little bit today. But overall, the last week, we've seen more allocation towards risk. We've seen a sense that the Fed is going to possibly have more of a dovish outcome with some of the Fed funds futures lowering the chances of further rate hikes at the end of the year, come December.

And with that, we have to ask ourselves, what in this Fed statement can we see? Because for those of you out there who know or understand, the Fed has eight meetings a year. Four of those include the summer of economic projections. So you see, effectively, the dot plot, interest rates, inflation where they project that out. That happens in the March, June, September, and December meeting. This meeting will not have that. So it'll simply be a statement. And we want to focus on a few things in that statement.

JARED BLIKRE: And you build trading systems around this. Without getting too, too wonky, you mentioned the Fed funds futures. Those are futures that track the short-term benchmark interest rate of the Federal Reserve. And so traders watch this as a potential signal as to what's going to happen next. You can see what traders expect it to be in a month, two months, three months, years down the line. So how are you gaming this? Because you are a systems developer, and you are going to be trading this next report.

JOHN NETTO: Sure, I'll be trading this next report, as I've traded many of the previous reports and, hopefully, future reports going forward. So there are four factors that I programmed my algorithm for. And ultimately, it's hopefully the viewers today can look at, all right, what does someone who trades algorithmically do to then incorporate into their investment and trading decisions and give something that's actionable.

So there are four things I'm going to look at in this report. One, how the Fed assesses the economy, two, how the Fed is assessing inflation, three, future rate hikes, and possibly four, are there any idiosyncrasies or small things that could come into play? Now specifically, let's talk about the path of future rate hikes. The Fed in the second paragraph of this four-paragraph statement has talked about that they want to-- that they see rate hikes as appropriate until that they've got a hold on inflation.

So what nuance in that language could the Fed come out with that would tilt this decision to a more dovish outcome or more hawkish outcome? On the dovish side, if they were to say that they only see possibly some more interest rate hikes as being appropriate, good to go. On the hawkish outcome, if they see that they need to have clear and convincing evidence, that would be more hawkish.

JARED BLIKRE: I got you. Before we go, I just want to show everybody this book that you wrote. It is a big, thick tome. I recommend everybody who's interested in building trading systems, which is what you do, read this, "The Global Macro Edge." And I got the signed version by you. This is 3 out of 50, special Wall Street edition. Thank you for inscribing it here. It took you a long time to write this book. When are you going to do the follow-up?

JOHN NETTO: Oooh. That's a loaded question, Jared. Well, it took 5 and 1/2 years to write the first one. Maybe the second one will take half that, so we'll see.

JARED BLIKRE: Yeah, well, I've just got a note in my ear from a producer. We have time for one more question. You're in New York. You're visiting with your daughter. What do you think now that you're back in the city? You lived here for some kind-- a period of time. Now that the pandemic is somewhat over, what are you seeing there?

JOHN NETTO: It's surprising. There's a lot of change. The city feels a little more polarized than when I left. I lived here from 2008 to 2015 and visited quite a bit. This is my first time back here in three years. And in some ways, the spirit of the city is very much what I remember it.

In other ways, it seems the culture has shifted somewhat, and we're still in a little bit of the pandemic hangover. But it is more vibrant than it has been in the last couple of years, so that's good to see. I think New York City is on the mend. There is a bit of a different cultural dynamic here.

JARED BLIKRE: Yeah, I think people still have a little bit of a pandemic hangover, as you were just saying. And we also have a huge amount of new influx of employees and people living here. So it takes a few weeks-- a few years to get used to this city. Really appreciate you stopping by, John Netto. Thank you.

JOHN NETTO: Thank you, Jared.