EXPECTED MARKET-MOVING EVENTS:
Wednesday: FOMC Rate Decision
Given that the “peak inflation” narrative has been put aside on Friday as the US CPI data showed inflationary pressures still rampant and the higher rate in long-term inflation expectations in the UoM Survey spooked the markets even more, I expect the markets to maintain a risk-off sentiment into the FOMC event on Wednesday and keep with the run on the US Dollar.
The UK GDP on Monday and the UK employment numbers on Tuesday won’t matter too much as the market will just keep on buying the USD into the FOMC. Same story for the German ZEW survey on Tuesday. I see these data as irrelevant as the market will just focus on positioning for the FOMC on Wednesday.
On Wednesday the FOMC is expected to hike by 50 bps bringing the rate to 1.25-1.50%. After the inflation data on Friday though the market started to price in a 75 bps chance and we saw such calls coming from Barclays and other economists like Summers. Further out the Fed is expected to hike by 50 bps at the July, September and October meeting and then going back to 25 bps pace from December onwards bringing the rate to 3.00-3.25% by year-end.
We will also get the Summary of Economic Projections (SEP) which should show a lower revision in growth rate, a higher revision in inflation rate and probably a higher revision in unemployment rate. The “dot plot”, which shows the forecast of year-end interest rates by the FOMC participants, will be lifted from the old projections of 1.75-2.00% we saw in March. Most probably they will reflect market expectations of 3.00-3.25%.
Last year in June the Fed surprised with a more hawkish than expected meeting and I feel like this one will be another. So, the pattern we saw lately, that is sell into FOMC, buy the fact and then sell again, may be broken this time and lead to just a sell-off into and out of the event. I really can’t see the Fed keeping the status quo and certainly not hinting at any pause or whatsoever like the infamous comments from Fed’s Bostic. At this point a recession is inevitable and the only way out of this inflationary mess as the ex-Fed President Paul Volcker taught us. In the major currencies space the clear winner will be the USD.
On Thursday we will have SNB and BoE Rate Decisions and on Friday it will be time for the BoJ. The SNB is expected to hold interest rates unchanged and strike a hawkish tone amid rising inflationary pressures in Switzerland. The BoE is expected to hike by 25 bps and keep a hawkish tone signalling further hikes ahead. The BoJ, on the other hand, is expected to keep its dovish tone as inflation in Japan is not as high as in the other developed countries and since they’ve been trying to get some inflation for several years, it doesn’t look like some overshoot from their 2% target is going to force their hands.
As previously noted, the Fed this week will be the major event and eclipse everything else. So, buckle up and prepare, because painful times lie ahead…
This article was written by Giuseppe Dellamotta.
