Source: Jin10 Data
Traders still tend to cut interest rates at least twice this year.
On Wednesday, Wall Street received a reality check as traders hoped the Federal Reserve would more aggressively cut borrowing costs, while the Fed is expected to cut interest rates only once in 2024.
Boosted by gains in rate-sensitive tech stocks like Apple, Microsoft, and Nvidia, the S&P 500 Index and Nasdaq 100 Index had narrowed gains after rising more than 1% earlier, but still approaching record highs. According to the Fed's swap transactions, while the Fed gave guidance, traders still prefer at least two rate cuts this year. Swaps contracts are still pricing in a 25 basis point rate cut for November and December.
Fed Chair Powell said at a press conference after the interest rate decision, “We have made moderate further progress in reaching our inflation goal. We need to see more good data to strengthen our confidence that inflation is sustainably moving toward 2%.”
Consumer Price Index (CPI) released on Wednesday morning was encouraging, and traders originally hoped it would represent a resumption of the downtrend in inflation after remaining high for most of this year. However, after the latest robust employment report sparked debate about how stringent monetary policy actually is, these data also confirmed the Fed's cautious attitude.
Investors will continue to analyze Powell's remarks to determine whether the positive dovish pricing that emerged after the CPI announcement was excessive. Cayla Seder, macro multi-asset strategist at State Street, said Powell's press conference and the FOMC's forecast "gave something to everyone." She said:"For doves, the good news is that, apart from still-strong GDP growth, there was no rate hike and confirmation that a rate cut was the next step, plus Powell emphasized that FOMC believes the labor market is in better balance. This sets a new standard for measuring labor data in the future."
The following are the views of others in Wall Street:
CEO Scott Colyer of Advisors Asset Management said, "The Fed will adjust their dot plot accordingly, so the dot plot has been changing and the stock traders know this. Obviously, the Fed really wants to cut rates at least once this year. And these rate cuts, even if only once, will still support stock prices."
Gregory Kuhl, portfolio manager at Janus Henderson Investors, said, "The market and the Fed seem to be consolidating around the same view - that the current level of interest rates is appropriate, but the Fed still wants to cut rates as the next step. We believe the housing component in CPI will continue to put downward pressure on the overall number, which could give the Fed more progress signals. It is important to note that unlike private real estate, listed real estate investment trusts have been priced by market value, so an environment of unchanged or falling interest rates should be a tailwind factor. "
Donald Ellenberger, senior portfolio manager at Federated Hermes, said, "I think the Fed definitely wants to see a drop in the inflation rate for at least three or four months. They want to ensure that the inflation rate reaches 2%, because the worst thing for the Fed is if they cut interest rates, the inflation rate will rise again, and then they have to reverse the interest rate cut and start raising rates again."
Dave Lutz, head of ETFs at Jones Trading, said,"The dot plot was more hawkish than expected, which eliminated some of the jittery sentiment today, but we need to see how the rest of the press conference is digested. I feel it's only the Bank of Japan left this week and we may see VIX start to trade back lower with stocks near highs."
Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors, said,"Investors have to accept the fact that the Fed is not the master. They only react to inflation, and inflation is reacting to economic growth. Inflation may stubbornly remain above the Fed's target before economic growth shows meaningful upward or downward breakouts, and you're not likely to see any drastic measures from the Fed."
Marvin Loh, senior macro strategist at State Street Global Markets, said,"The Fed's views on how the economy will develop this year seem increasingly divergent, as evidenced by the division in how they view the flow of funds for the year. However, the dot plot shows that they are becoming increasingly confident that normalization can be achieved more quickly as soon as they start. Although the number of rate cuts this year has been reduced to only one, it is neutral-leaning dovish."
Mohamed El-Erian, columnist for Bloomberg and president of Queens College, Cambridge, said, "I have a question for Powell, do these numbers and the four officials' expectations of no rate cut reflect this morning's inflation data?"
Kevin Caron, senior portfolio manager at Washington Crossing Advisors, said,"Despite the dot plot showing the Fed will cut interest rates once this year, I don't think we should be surprised because the Fed's message on inflation hasn't changed: they want convincing evidence that we are on a sustainable path to 2% - and that takes several months."
Bank of America's forex strategist Alex Cohen said, "The dot plot reads hawkish, or it's better to use the word 'cautious'. There will only be one interest rate cut in 2024. I think this explains why the dollar bounced back from the significant drop after the CPI release."
Bank of New York Mellon's forex and macro strategist John Velis said, "Overall, considering that the CPI data released this morning may not be reflected in the dot plot, it's not as hawkish as it originally appeared to be... The 'higher for longer' neutral rate of 2.6% has been raised to 2.8%. The neutral rate has been 2.5% until March. This supports the argument for a higher equilibrium neutral rate."
Editor/Lambor