Source: Caixin.
Despite lower-than-expected US CPI figures setting an optimistic tone for the market on this 'Super Wednesday' night, the more hawkish than expected Fed has ultimately added a touch of gloom to the party atmosphere in the market. After a tense night of deliberation, everything seems to suggest that a Fed rate cut will have to wait. In terms of product structure, $100-300 billion products have operating incomes of 401/1288/60 million yuan respectively.
In fact, over the past few weeks, the macro fundamentals in the United States have been increasingly contrasting.
The declining economic data since the second quarter is largely in favor of supporting the Fed to start an earlier and larger rate cut, even if last week's unexpected hot non-farm payroll report did display negative signs with the unemployment rate rising to 4%.
At the same time, the hawkish attitudes of Fed officials have not changed too much. In the tug of war in the past month over interest-rate cuts, each time the expectation has been suppressed, either by the hawkish Fed minutes or by some extreme comments from a Fed official who approves of no rate cuts within the year.
Last night's 'Super Wednesday' seemed to be a microcosm of all this.
Last night's data was indeed more supportive of rate cuts in the second half: the May CPI report released by the US Department of Labor showed that the CPI year-over-year and month-over-month for four groups in total and the core were all under expectations. Among them, the May CPI in the US was flat month-over-month and expected to increase by 0.1%; it increased year-over-year by 3.3% which was also below the estimated value of 3.4%; core CPI, which excludes energy and food, rose month-over-month by 0.2%, expected to increase by 0.3%; core CPI rose year-over-year by 3.4% with an estimated value of 3.5%.
It can be said that this is an inflation report that can't pick out any major flaws. Therefore, people did see the collective joy in the stock, bond and commodity markets after the CPI report was released: the three major US stock indices all opened higher, with the 10-year US bond yield dropping by an astonishing 15 basis points at one point during the session, while spot gold price rose above $2340 in the session.
Perhaps as we mentioned in '交渉時計...美国利率的三个不完整标志', traders did seem to have an early hunch that Wednesday's CPI data might come with good news.US stocks and bonds rose together to welcome "Super Wednesday": Will Wall Street celebrate the victory of tonight's CPI?However, all the crazed rallies in the major markets were ultimately shattered by the 'roaring Fed' after the New York session.
After the New York session, investors in all major asset classes may still need to remain highly vigilant about the potential reversal of the market.
As the most anticipated part of the Fed’s rate decision, last night’s June rate dot plot released a very clear hawkish signal:
-The median in the dot plot expected rates to be cut only once in 2024, which is two cuts less than the forecast in the previous March dot plot and more hawkish than market consensus which expected two cuts."
"-Four Fed officials advocated no rate cut this year in this dot plot, this may mean that the most extreme hawkish forces within the Fed are growing. Ironically, all 10 dots that supported three rate cuts this year in the March dot plot have been removed this time.
"-As the expected number of rate cuts decreased this year, Fed officials also raised their expected policy interest rate paths afterwards. Their median expectation of policy rates at the end of 2025 was raised from 3.9% to 4.1%, while the median expectation of the long-term policy rate was raised from 2.6% to 2.8%, which also means that the Fed now recognizes that the 'neutral interest rate' is rising. In the past six months, policymakers have raised their long-term rate expectations by about 25 basis points."
"In the subsequent press conference, Fed Chairman Powell said, "The Federal Reserve remains highly concerned about inflation risks. So far this year, we have not had greater confidence in inflation to cut interest rates."
"If the economy remains stable and inflation persists, we are ready to keep interest rates unchanged under appropriate circumstances. If employment is weaker than expected, the Fed is prepared to act." Powell said the Fed will continue to make decisions on a meeting-by-meeting basis. "We haven't committed to a particular path of rate cuts."
"Regarding the May CPI report released before the conference, Powell said," We are pleased with today's inflation data and hope to have more similar data." He emphasized that the test of a rate cut is more about confidence in the inflation rate approaching 2%. "We take today's CPI report as progress and it strengthens our confidence." Powell revealed that the day’s CPI data had been preliminarily included in this meeting. "Some people have indeed updated their predictions, but most people have not."
Looking at the market trends throughout the day, although the S&P 500 and the Nasdaq set historic highs again overnight, investors may still need to remain highly vigilant about the potential reversal of the main assets approaching the closing bell after the Fed decision.
In fact, even in the three major US stock indices there was no overall increase overnight. As the tail return of gains eroded, the Dow Jones ended up falling by 35.21 points, or 0.09%, to 38,712.21 points.
In the US bond market, the yield of bonds at all maturities shrank their losses near the end of the day. Among them, the yield of 2-year US Treasury bonds fell by 7.8 basis points to 4.76%, the yield of 5-year US Treasury bonds fell by 9.7 basis points to 4.322%, the yield of 10-year US Treasury bonds fell by 8.2 basis points to 4.319%, and the yield of 30-year US Treasury bonds fell by 5.8 basis points to 4.476%.
Although the dollar closed lower on Wednesday, it reversed most of the previous decline after the hawkish dot plot was released.
Bitcoin soared to $70,000 after the CPI data, but then completely gave back all the gains.
The same phenomenon also occurred in gold.
From the pricing of the interest rate market, traders currently expect the Fed to cut rates by 43 basis points within the year. This expected magnitude once exceeded 50 basis points (that is, two rate cuts were fully priced) after the CPI data, but after the Fed's decision was released, it became less certain whether there would be two rate cuts within the year.
Of course, as far as the first rate cut window is concerned, the industry still believes that there is a good chance of a rate cut in September. The CME FedWatch tool shows that the probability of a rate cut in September is about 62%.
Regarding this, Chris Low, chief economist at FHN Financial, said that the situation on Wednesday shows that it is too early to get excited about rate cuts. The latest release of the May CPI is good news, but the one or two rate cuts implied by the June "dot plot" remind us that we need more reports like May before the Fed can cut rates with confidence.
However, Caixin Macro still believes that there is no direct evidence to rule out the possibility of a rate cut in September. This depends entirely on the latest data. If, as we expect, employment growth slows again, and the May inflation data is proved to be the beginning of a new round of inflation cooling, then the most likely outcome is still two rate cuts this year.
Editor/tolk