Just tonight! The most "tense and stimulusive" Fed interest rate night in 2024 is coming

Finance Associated Press

2024-06-12 15:06Published on the official account of Cailianpress, a subsidiary of Shanghai Shanghai Poster Industry Group

Finance Associated Press, June 12 (Editor Xiaoxiang) For the global financial market, which is the U.S. macro risk event that has the greatest impact on the short-term market?

I believe that some people may think that it is a more intuitive impact on the Fed decision, while others may answer that it is the US CPI, which is relatively more unpredictable. But it doesn't matter, no matter which one of the above answers, people will be facing the two "eye of the storm" tonight: because this time it will be extremely rare that both will be released on the same day!

Historically, both the CPI report and the Fed's policy decision have been a source of turmoil on the day they are released, but these two events rarely happen on the same day. According to Dow Jones Markets, in the 16 years since 2008, there have only been 13 times when the CPI report and the Fed's policy decision were released on the same day.

And there's no doubt that Wall Street traders are clearly gearing up for this rare big day right now. Even traders from across the ocean did not dare to be careless tonight, and some were even ready to stay up all night.

Motonari Sakai, Head of Foreign Exchange and Financial Products Trading at Mitsubishi UFJ Trust Bank, has been preparing for tonight early. "I don't have dinner scheduled, and I'm going to avoid drinking at home, just to be able to focus on the US CPI release, and then I'll probably stay up all night waiting for the Fed decision to be released in the early hours of the morning," Sakai said. ”

According to the schedule, the U.S. Department of Labor is scheduled to release May CPI data at 20:30 Beijing time tonight; The Federal Reserve will announce its June interest rate decision at 2 a.m. Beijing time on Thursday, and Chairman Jerome Powell will hold a press conference half an hour later (2:30) as usual. For the global market, in the past six hours, whether it is the stock market, the bond market, the foreign exchange market or the commodity market, it is likely to face several waves of fierce market movements......

Appetizer for the night: US CPI for May

With the Fed's decision "Yellow Sparrow Behind", the short-term market triggered by tonight's CPI data is likely to be destined to last long. However, that still doesn't mean tonight's inflation data isn't important. In fact, the quality of the CPI is likely to set the tone for tonight's market for the first time, and affect people's prediction of the Fed's hawkish attitude, and even the distribution of the Fed's dot plot may be affected as a result.

Nick Timiraos, a well-known reporter for the Wall Street Journal, known as the "new Fed news agency", said that although most of the groundwork for the Fed meeting was completed in advance days and weeks before the meeting. But there will be a variable on Wednesday where the dot plot interest rate projections are likely to be revised based on the Labor Department's CPI inflation data for May. If the inflation report disappoints, more officials are likely to stick to their predictions of no more than one rate cut this year. And if the inflation report is modest, more officials may make predictions of two rate cuts.

So, what exactly is the market's expectation of CPI tonight?

According to media surveys of economists, the year-on-year increase in the US headline CPI in May is expected to remain at 3.4%. However, the month-on-month data may be positive - the CPI is expected to rise by only 0.1% month-on-month last month, which is significantly lower than the 0.3% month-on-month increase in April. If the final data is in line with expectations, it will also be the smallest month-on-month increase in CPI since October 2023.

In terms of core CPI, the year-on-year growth rate of core CPI in May is expected to fall back to 3.5%, compared with 3.6% in the previous month; The month-on-month growth rate is expected to remain unchanged from the previous month at 0.3%.

Here's a breakdown of Wall Street's forecasts for tonight's CPI data by Nick Timiraos:

According to Dow Jones Markets, the S&P 500 and Nasdaq have risen or fallen by about 1% on four of the five CPI release days so far this year. Therefore, it is clear that we need to be careful about the risk of US stocks opening sharply higher or lower tonight.

Regarding the specific impact of CPI data on the trend of U.S. stocks tonight, we have actually introduced JPMorgan Chase's four types of scenario estimates in previous reports, and interested investors can review and refer to them on their own.

Of course, as shown in the chart below, Goldman Sachs has similar forecasts, and investors can compare them with each other.

Investors need to be reminded that whether it is Xiaomo or Goldman Sachs, their estimates of CPI tonight are mainly based on the core CPI month-on-month indicator.

And again, as Xiao Mo wrote in a note to clients on Monday, since the CPI report and the Fed decision will be released on the same day, Powell's press conference may still end up reversing the CPI results. Therefore, tonight's CPI data is only an "appetizer" after all - the real decisive moment may be left in the early hours of Thursday Beijing time.

What to watch for tonight's Fed decision?

The Fed is widely expected to keep the target range for the federal funds rate unchanged at 5.25%-5.5% after its two-day meeting ends at 2 a.m. Beijing time on Thursday, but economists will be watching closely for clues on the timing of the central bank's first rate cut in four years.

Since last July, the Fed has kept its benchmark interest rate at a range that has been at a high level in more than 20 years. Powell has insisted over the past few months that this level of interest rates can push inflation down enough to slow demand, but tighter policy will need to be maintained for longer to ensure that inflation cools.

This means that the US Federal Reserve Open Market Committee (FOMC) may cut interest rates for the first time in one of the last three meetings of the year in September, November or December, although there is a smaller chance that it will not be until 2025. All market participants will be looking for answers in the Fed's policy statement, the latest quarterly economic projections, the interest rate dot plot, and Powell's press conference......

Here's our look at the specific takeaways from tonight's Fed decision:

(1) Will there be a major change in the Fed's policy statement?

It is expected that the FOMC will almost certainly retain interest rate guidance in its post-meeting policy statement that it is not appropriate to cut rates until there is more confidence that inflation is continuing to move towards the 2% target.

In its May statement, the FOMC said it had "lacked further progress in recent months toward the Committee's 2% inflation target." Some institutions, including Goldman Sachs, have expected the Fed to remove or modify the wording. Keeping this statement in mind could be interpreted as hawkish, as the April inflation data released since the May policy meeting showed that inflation was moderated from the previous three months.

Of course, in terms of whether to delete the wording or not, the quality of CPI tonight is expected to also play a key role.

On the official side, St. Louis Fed President Joseph Mousalem, who took office in April (without voting rights this year), will present his quarterly projections for the first time at this week's meeting. At the same time, this is also the last interest rate meeting attended by Cleveland Fed President Mester (a member of this year's voting committee), who will step down when her term expires at the end of June.

(2) Will Fed officials consider cutting interest rates once or twice this year?

In the dot plot in March this year, Fed officials argued that three rate cuts could be the best policy option in 2024. But with inflation data sticky, most economists now believe that the Fed will only forecast one or two rate cuts.

Therefore, one of the main events of the market tonight will be on the new quarterly interest rate forecast, the so-called "dot plot" of interest rates. In March, most officials expected two or three rate cuts this year; The median expected (or midpoint) of the 19 officials is three, but with just one "point" shift affecting the median, the number of rate cuts estimated for the dot plot will be reduced to two during the year.

Many Wall Street people say that whether the dot plot shows one or two rate cuts this year is expected to be directly related to whether the first cut can be achieved in September - if the median forecast is two rate cuts this year, then the hope of September becoming the first cut window will be greatly increased. And if the median forecast is for only one rate cut, it means that rate cuts are likely to start later this year.

Jan Hatzius, chief economist at Goldman Sachs, said, "This will be seen as a pretty strong signal." ”

Pollick of the Canadian Imperial Bank of Commerce also said that if the Fed plans to cut interest rates twice, it will be seen as an accommodative policy stance. This would indicate that interest rates may be cut in September, before the US presidential election. Many economists believe that the Fed will forecast two rate cuts this year, which would give them flexibility. And if there is only one rate cut, it indicates that the Fed's policy stance is more neutral or hawkish.

In addition to a few rate cuts this year, the focus of some industry insiders may have gradually shifted to next year. "We're going to quickly turn the page to 2025," said Kevin Flanagan, head of fixed income strategy at WisdomTree. "Maybe we'll have one or two rate cuts this year, but how many will we have next year? As we approach the second half of the year, this will quickly become the center of attention. ”

In the March dot plot, the Fed's median policy rate expectations for 2025 and 2026 were 3.9% and 3.1%, and the median forecast for long-term rates was raised to 2.6% from 2.5%.

The chart below is Goldman Sachs' estimate of tonight's dot plot movement. Overall, Goldman Sachs, like most Wall Streeters, expects the median dot plot to show two rate cuts to 4.875% in June (three in March), four cuts to 3.875% in 2025 (three cuts in March, but the total rate cuts for two years), and three cuts to 3.125% in 2026 (unchanged).

(3) Will there be more traces of no rate cuts or interest rate hikes in the next year?

Regardless of whether the interest rate is cut once or twice during the year, although the degree of eagle doves varies, it is actually within the acceptable range of market participants at present. However, some industry insiders are more concerned about whether tonight's Fed decision will still have some "traces" of extreme hawkishness.

(Wall Street estimates the number of interest rate cuts and the window for the first cut during the year, and there are still a few investment banks that expect no interest rate cuts within the year)

Some industry institutions are currently worried about whether there will be more points in the dot plot tonight that support not cutting interest rates this year. If a number of Fed officials choose to do so, the general view among economists that the Fed is still inclined to cut rates this year may be called into question.

Yelena Shulyatyeva, an economist at BNP Paribas, expects three Fed officials to hint at not cutting interest rates. She expects six officials to hint at one rate cut and 10 to hint at two.

However, Ryan Sweet, chief U.S. economist at Oxford Economics, believes that a number of officials are unlikely to hint at no rate cuts. He said in an interview: "I don't think their attitude will change so much. ”

In addition, the minutes of the Fed's last meeting, held in early May, showed that many officials mentioned being prepared to raise interest rates again "when the risk of inflation materializes and it is appropriate to act." This is at odds with Powell's suggestion at the time that a rate hike was unlikely. At tonight's press conference, many industry insiders may also pay attention to Powell's latest statement.

Michael Gapen, head of U.S. economics at BofA Securities, said: "Powell is likely to keep the rate hike threshold quite high, which is a low-probability event. ”

Thomas Hoenig, a former president of the Kansas City Fed, said in a recent interview that raising interest rates would be too risky and would volatile the market. "As far as I know, there aren't many members of the FOMC who want to raise rates. As long as inflation doesn't rise, the Fed will wait and see. ”

(4) How does Powell view the latest trends in U.S. employment and inflation?

The Fed Chairman will certainly also be asked for his views on the latest developments in US employment and inflation during his Q&A session tonight.

"People may be asked what he thinks of the recent economic weakness," said Stephanie Roth, chief economist at Wolf Research. "He might say they're monitoring it, and so far, the consumer seems to be doing okay – maybe there's some cracks in the lower end of the market – but that's exactly what they're keeping a close eye on."

Nick Timiraos, the New Fed News Agency, said Fed officials have struggled to find a balance this year. On the one hand, there are growing signs that the acute shortages and imbalances in the labor market over the past three years have been resolved, and have not been accompanied by a significant increase in unemployment, which raises the question of whether the labor market will weaken marginally. But despite this, economic activity has been solid. The steady decline in inflation in the second half of last year has stalled this year, leaving officials with little confidence that the downward trend will continue.

According to TD Securities strategists Oscar Munoz and Gennadiy Goldberg, Powell is likely to look a little optimistic given the recent changes in data, especially if the May CPI can show further progress in the inflation rate.

In the latest quarterly forecasts, Fed policymakers are likely to raise their inflation forecasts for 2024 to reflect higher-than-expected inflation data in the first quarter, according to industry surveys. And with the monthly report released on Friday showing that the unemployment rate climbed to 4% in May, the highest level in more than two years, they may also raise their forecasts for the unemployment rate.

Is Super Wednesday worth looking forward to for the market?

Stuart Kaiser, head of U.S. equity trading strategy at Citigroup, said the options market is currently betting that the S&P 500 will move 1.25% in either direction on the day, based on the cost of at-the-money puts and calls. Over the past year, the CPI and the Fed's daily gains have been priced in a similar amount, averaging 0.75%, so the combination of the two would make it a bigger event and add to the uncertainty, Kaiser said.

An interesting set of historical statistics is that although the sample size of the Fed's "encounter" on the day of the CPI release is small, according to Dow Jones market data, the three major US stock indexes tend to rise on these days - in these 13 times, the S&P 500 rose by an average of 0.7%, the Dow rose by an average of 0.9%, and the Nasdaq Composite rose by more than 1% on average.

A survey conducted by 22V Research earlier this week also showed that the majority of investors surveyed are betting that both tonight's CPI and the Fed decision will trigger a "Risk On".

Of course, there are also some market participants who believe that although Wednesday is a rare big day, it is expected that the volatility of US stocks will not be much greater than usual.

Dave Sekera, chief U.S. market strategist at Morningstar Research Services, said market volatility would have risen on Wednesday if Fed Chair Jerome Powell had "made some unexpected remarks" at the Fed's post-meeting press conference. But I think that's very unlikely, because he [Powell] is always very careful about his comments.

At the same time, if the CPI data is in line with or better than expected, it could lead to some positive market sentiment, but given the current high valuations of US equities, Sekera and his team see "little near-term upside" for US equities. On the other hand, Sekera said that if the inflation measure is much higher than expected, it could cause U.S. stocks to fall, but the decline will also depend on how much higher inflation is than expected on average.

According to Dow Jones Market Data, the S&P 500 has risen by an average of only 0.1% on the three Fed decision days this year, while the Dow and Nasdaq have both fallen by about 0.4% on average.

(Finance Associated Press Xiaoxiang)

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