Fed seen “skipping” June, maybe hiking in July?

Fed seen “skipping” June, maybe hiking in July?

Headlines

* Fed expected to pause aggressive rate-rising campaign    

* USD skids to 3-week low as US CPI data reinforces Fed “skip” view

* BoE’s Bailey laments slow falling inflation in “very tight” job market

* Asian shares up, dollar wobbly ahead of FOMC meeting

FX: USD fell to a near 4-week low at 103.04. That touched the 100-day SMA. But the DXY closed back in (the bottom of) its recent range at 103.30.  The 2-year yield hit fresh 3-month highs at 4.70% after initially dipping on the US CPI data. The 10-year yield finished at 3.81% after hitting 3.84%. The May top is at 3.85%.

EUR rose to a 3-week high of 1.0823 before settling at 1.0792. GBP soared 0.8% and made a one-month high at 1.2624, closing at 1.2611. The hot jobs data pushed UK bond yields markedly higher. The peak rate in the UK is now seen at 5.75%. That is near the Truss-era highs last October during the sterling pension crisis. USD/JPY advanced up to 140.20. The recent high is at 140.93.  AUD popped north to 0.6806 before closing at 0.6766. USD/CAD dipped to a fresh low at 1.3315. The year-to-date February bottom is at 1.3262.  

Stocks: The US equities melt-up continued in tech with major indices closing near fresh highs. The benchmark S&P 500 added 0.69% notching new 14-month highs. It pushed higher into the bull market territory it entered last week. The tech-heavy Nasdaq also hit those highs gaining 0.79%. The Dow managed to add 0.43%. Its intraday top broke its previous strong resistance at 34,281.

Asian stocks traded mixed and tentative ahead of the FOMC meeting. The Nikkei 225 extended its advance as autos and other exporters benefitted from the soft yen. The broad consensus for the BoJ to keep its uber-dovish policy on Friday also helped. The Hang Seng was kept afloat by stimulus talk.

US equity futures are flat. European equity futures are indicating a softer open (-0.1%). The Euro Stoxx 50 closed up 0.7% yesterday.

Gold fell to support at the 100-day SMA at $1941. The May low is at $1932. All eyes turn to the today’s Fed meeting with the dot plot important. In March, only 7 of the 18 FOMC members regarded higher interest rates than the current level as appropriate. If this number rises significantly, the market is likely to bet increasingly on a rate hike in July. In this case, gold could get sold with the next support below $1900.

The day ahead – Focus on Fed July outlook and beyond

Yesterday’s more or less inline US inflation data supported expectations of a no-change outcome from the FOMC today. There is currently around a 66% chance of a 25bp rate hike in July. The key issue for policymakers is that recent data has given mixed signals about the resilience of the economy. The labour market remains relatively hot with strong monthly job gains still being underestimated by economists. But wage growth ticked lower and PMI survey data points to darker clouds lurking around the outlook. 

It seems likely that policymakers will continue to lean towards data dependence, so keeping their options open to another rate rise. Aside from attention on Chair Powell's tone and language, another issue that may complicate things is the dot plot. This is the member's projections for the Fed funds rate.

If the Fed holds this week and the median projection for the Fed funds rate reinforces that they’ve hit the peak rate with about 75bps of cuts in 2024, then markets could rally on the increased confidence that the next move in rates is down relative to the marginal pricing for another hike. If the Fed hikes this week and signals it is done, then the effects may be similar. A more hawkish market outcome would be to hike and leave the door open to signal further tightening followed by a muted easing path. This would boost the dollar and hit gold and stocks.

Chart of the Day – USD/CAD nears strong support

The surprise BoC rate hike last week came due to the surprising resilience of demand and concern about the uptick in inflation. Friday’s headline jobs data was disappoiting. But it followed eight months of gains and showed via low unemployment and still elevated wage growth that the labour market remains tight.

Strong oil support and the positive risk backdrop should underpin support for the loonie. That means a run at 1.3262 which is the early February low. Much depends on the Fed obviously. Resistance is at recent near-term highs around 1.3390 and short-term trendline resistance.