June 13, 2024
CURRENCIES
USD and US Equities Post-FOMC Analysis
- Fed trims rate cut expectations due to higher inflation forecasts.
- USD regains some strength on hawkish projections.
- US equities rally on lower yields and USD despite inflation concerns.
Fed’s Decision on Rate Cuts
- Rate Cut Adjustments:
- After May’s inflation data, the Fed revised its interest rate outlook, reducing expected rate cuts for 2024 from three to one 25 basis point cut.
- This change was driven by persistent inflation, leading the Fed to adopt a more conservative approach, maintaining current restrictive interest rates.
- Economic Projections:
- Growth and unemployment forecasts for this year remained unchanged.
- Labour market expected to ease slightly by the end of 2025.
- Headline and core PCE data projected to rise this year and next, with a firmer Fed funds rate anticipated over the same period.
USD Performance on Hawkish Forecasts
- USD Recovery:
- Hawkish forecasts helped the dollar recover some losses from earlier softer CPI data.
- Dollar continues its bullish momentum, but upcoming PPI data could influence its trajectory.
- Market Reactions:
- Markets considered a second rate cut after the CPI print, but Fed projections cast doubt on this.
- Dollar strength is supported by a weaker euro, affected by political developments in France.
STOCK MARKET
Market Overview
- US inflation cooled in May, as per the Bureau of Labor Statistics.
- Consumer Price Index (CPI) remained flat month-over-month and rose 3.3% annually, both measures below expectations and lower than April’s increases.
Details of the CPI Report
- Headline Inflation:
- Monthly CPI increase: 0.0%, lowest since July 2022.
- Annual CPI increase: 3.3%, down from April’s 3.4%.
- Decline driven by falling energy prices, especially gas.
- Core Inflation:
- Monthly core CPI increase (excluding food and gas): 0.2%, lowest since June 2023.
- Annual core CPI increase: 3.4%, lower than April’s 3.6%.
- Shelter costs remained a significant factor in core inflation, rising 0.4% month-over-month.
Market Reactions
- Treasury Yields and Equities:
- 10-year Treasury yield dropped by 12 basis points to around 4.29%.
- Stock markets rose: NASDAQ (+1.53%), S&P 500 (+0.85%), Dow Jones (-0.09%).
- Fed’s Perspective:
- The CPI data provided a positive outlook for the Federal Reserve ahead of its policy decision.
- Despite the easing inflation, the Fed maintained a “bumpy” path to its 2% target.
Economic Indicators and Projections
- Labor Market:
- Added 272,000 nonfarm payroll jobs in May, surpassing the 180,000 expectation.
- Wages rose 4.1%, with the unemployment rate slightly increasing to 4%.
- Preferred Inflation Gauge:
- Core PCE price index remained steady at 2.8% year-over-year for April.
- Rate Cut Expectations:
- Investors anticipate one to two 25-basis-point cuts in 2024, down from six cuts earlier projected.
- CME FedWatch Tool indicates a 69% chance of rate cuts starting in September, up from 53% the day before.
Specific Index Movements
- Shelter and Rent:
- Shelter index rose 5.4% annually, 0.4% monthly.
- Rent and owners’ equivalent rent each increased by 0.4% monthly.
- Lodging away from home decreased slightly.
- Energy:
- Energy prices fell 2% monthly, up 3.7% annually.
- Gas prices dropped 3.6% from April to May.
- Food:
- Food index rose 2.1% annually, 0.1% monthly.
- Food at home was flat, food away from home rose 0.4%.
- Other Indexes:
- Increases: Medical care, used cars and trucks, education.
- Decreases: Airline fares, new vehicles, communication, recreation, apparel.
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