USD, US Equities Analysis Post-FOMC
- Fed forced to trim rate cut bets due to hotter inflation profile
- USD reclaims some lost ground on hawkish forecasts
- US equities rally on lower yields, USD despite the hotter inflation outlook
The Fed Forced to Trim Rate Cut Bets due to Hotter Inflation Profile
Federal reserve members were allowed the opportunity to revise their individual interest rate outlooks after May’s inflation data was released just hours before the two-day meeting was due to conclude on Wednesday.
In the end, officials stepped back from their March projections where three rate cuts were deemed appropriate for this year; now opting for just the single 25 basis point cut for 2024. The decision was largely influenced by a series of stubborn inflation prints which recently showed signs of ‘modest’ progress but ultimately forced the Fed to adopt a more conservative stance, being prepared to maintain interest rates at current, restrictive levels.
Growth and unemployment forecasts remained the same for this year but the labour market is expected to ease slightly by the end of 2025. The big movers included headline and core PCE data, rising this year and next, with the Fed funds rate also expected to be firmer over the same horizon.
Summary of Economic Projections (June 2024)
Source: US Federal Reserve Bank, prepared by Richard Snow
USD Reclaims Some Lost Ground on Hawkish Forecasts
The hawkish forecasts helped the dollar partially recover losses from the earlier, softer CPI print that sent the greenback notably lower. Today the dollar appears to continue the bullish momentum from late in the day yesterday but PPI data this afternoon could bring the focus back to an inflation profile that is evolving in a more favourable manner which could cap USD upside if PPI comes in below the consensus number of 0.1% which is already low as it is.
Markets brought a second rate cut back onto the table after the CPI print yesterday but that was thrown into doubt after the Fed projections where it remains a strong possibility but Is no longer fully priced in.
Dollar bulls will be encouraged by a vulnerable euro , which sold off after the French President Emmanual Macron announced a snap election scheduled for the end of this month. This theme may re-emerge once the CPI data appears in the rear-view mirror and we get closer to the election.
US Dollar Basket (DXY)
Source: TradingView, prepared by Richard Snow
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US Equities Rally on Lower Yields, USD Despite the Hotter Inflation Outlook
Stocks rallied on the softer inflation print and appear undeterred by the Fed’s hotter inflation outlook. Stocks tend to do well when the dollar and US Treasury yields sink. This effect has been amplified by the fact markets remain hopeful of that second rate cut which remains a strong possibility.
Yesterday, the 5,500 level was identified as upside resistance, a level that is expected to be tested or even breached at the open today. The futures market anticipate a gap higher at the start of trading in New York at 09:30 AM (Eastern Time).
S&P 500 E-Mini Futures (ES1!) Daily Chart
Source: TradingView, prepared by Richard Snow
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US 500
Bullish
of clients are
net long.
of clients are
net short.
| Change in | Longs | Shorts | OI |
| Daily | -10% | 5% | 0% |
| Weekly | -17% | 6% | -2% |
The Nasdaq is also expected to gap higher at the open today, with the continuous futures falling just shy of the psychological 20,000 level. Something to be wary of is the current overbought nature of the advance heading into the last two sessions of the week.
Nasdaq E-Mini Futures (NQ1!) Daily Chart
Source: TradingView, prepared by Richard Snow