Market expects another Fed hike today but will it be the last one?
World's most important central banks will announce their monetary policy decisions this week and Fed will be the first one to do so this evening! US central bank will announce its decision today at 7:00 pm BST, followed by ECB tomorrow and Bank of Japan on Friday. When it comes to Fed, the situation looks rather clear - market is almost 100% sure that 25 bp rate hike will be delivered. Having said that, markets' attention will be on changes in the statement as well as Powell's presser as those may hint at what the next move will be.
Markets sees only one more rate hike from Fed
Fed clearly communicated that we can expect at least two rate hikes back at June meeting. According to the Fed, the pause in June was merely a slowdown in the pace of rate increases. Dot-plot clearly showed that most FOMC members still foresee two more rate hikes this year, even amid a notable decline in inflation. After the recent drop in CPI inflation to 3% and core inflation to 4.8%, market participants had hoped that the Fed would opt for a less "aggressive" approach. On the other hand, considering the very strong job market, it seems that the Fed has no reason to deviate from the path it has chosen.
Of course, when looking at the inflation contributions, the largest factor driving inflation currently is the rent equivalent. Nevertheless, even with a decrease in this contribution, it's important to remember that inflation will likely rebound in the last quarter of this year, partly due to higher fuel prices compared to the last months of the previous year.
CPI inflation to rebound by the end of this year
CPI inflation has fallen quick than expected but considering the average behavior of monthly inflation in recent years, it is almost certain that inflation will be higher by the end of this year, possibly reaching even 4% in January. The Fed will want to avoid a scenario similar to the 1970s when inflation surged strongly and reached new, previously unseen highs. Source: Bloomberg, XTB
Job market remains strong
The latest NFP report showed the smallest job increase in the post-pandemic period. Nevertheless, the job market remains tight, considering the scale of monetary policy tightening in the US. Jobless claims show that we should not expect a significant rebound in the unemployment rate in the near term, although the Fed itself sees the unemployment rate well above 4% by the end of this year. Source: Bloomberg, XTB
Will the market change its expectations after today's meeting?
The market sees around a 20% probability of a rate hike in September and November. Based on the recent statements from Fed members, it does not seem that Powell will change his stance, and the statement has clearly shifted. It appears that, for the Fed, the job market will now play a more significant role than inflation. Before the September meeting, we will receive the NFP reports for July and August. Only a significant decline in job growth and an increase in the unemployment rate could potentially lead to a change in the Fed's stance.
The market sees over 90% probability of a rate hike today and around 20% for the next two meetings. Source: Bloomberg, XTB
A look at US100
US100 (NASDAQ 100 futures) is holding within the range of the last significant correction in the uptrend that began in February but accelerated at the end of April this year. The key support levels in the current uptrend are 15,400 points, followed by 14,800 points. At the same time, the US100 remains in a powerful divergence with the prices of US Treasuries (TNOTE). A more dovish communication from the Fed could lead to an increase in bond prices, which would be a supportive factor for the US100. However, it is also worth remembering that the US100 largely reacts to information coming from companies that are currently publishing their second-quarter results. The US100 remains about 7% below historical highs.
It should be noted that US100 and EURUSD have experienced quite large correction recently. Having said that, regardless of the tone of Fed meeting (unless it will be extremely hawkish) there is a chance for the markets to pare part of recent moves. Of course, the long-term outlook will depend on the aforementioned jobs market, which at the moment seems to be key for US central bankers.
Source: xStation5
