2023-06-12 07:00:00
Wall Street expects the Fed may pause interest rate hikes in June but not give up tightening (hawkish pause/hawkish skip).
There is a view that even if the Fed does not raise interest rates when it wraps up its two-day policy meeting on Wednesday, its tightening stance will rattle markets.
There are fears that such an outcome might spark a reversal in U.S. stocks, especially if the May inflation figures are unrealistically high, prompting the Fed to take even more extreme steps, such as announcing a rate hike on Wednesday despite previous hints of abandoning tightening; The data will be released ahead of the Federal Reserve’s policy meeting on Tuesday.
The consumer price index (CPI) is expected to rise 4.0% year-on-year in May, down from a 4.9% increase in the previous month, while core CPI growth, which excludes food and energy prices, is expected to slow to 5.3% from 5.5%.
On the other hand, economic weakness and signs of continued cooling in inflation will support the Fed’s pause in raising interest rates in June, while suggesting that a potential rate hike at the next meeting in July may be the end of the current cycle of interest rate hikes, several senior Fed officials have previously said. Made a hint of a pause in interest rate hikes in June.
“Weaker U.S. economic data should support the view that the June pause in rate hikes might eventually turn into a July pause,” Craig Erlam, senior market analyst at OANDA, said in emailed comments. Will remain weak or largely flat: retail sales likely to be flat mom, Fed district surveys should remain in negative territory, and consumer confidence will swing.”
Wednesday’s meeting comes at a critical time for markets. U.S. stocks have been strong for more than six months, with the S&P 500 up more than 20% from its Oct. 12 closing low, according to FactSet. Just last week, the index moved out of bear market territory for the first time in a year.
The index has climbed 12% so far in 2023, recovering some of its 19.4% drop in 2022; last year saw its biggest calendar-year drop since 2008, according to Dow Jones Market Data.
So far this year, high-flying tech stocks have masked weakness in the rest of the market. That has started to change over the past two weeks, with small-cap and value stocks suddenly trading higher, but there are concerns that the Fed might hurt interest rates if Fed Chairman Jerome Powell signals a higher rate rise than investors currently expect. The most interest-sensitive tech stocks.
Ed Yardeni, president of Yardeni Research, said the so-called “big eight” have driven nearly all of the S&P 500’s gains this year; Tesla (Tesla, TSLA), Netflix (NFLX), Nvidia (NVDA), and Meta Platforms (META). He includes his analysis in reports to clients.
But the Russell 2000 index of U.S. small-cap stocks has risen more than 6.6 percent since early June, according to FactSet. The Russell 1000 value index has also gained nearly 3.7% during that time. Both have outperformed the tech-heavy Nasdaq Composite over that period, though the latter still led the way, climbing 26.7% since Jan. 1.
Concerns over the Fed’s plans intensified this week following the Bank of Canada unexpectedly raised interest rates, ending a four-month pause. The Bank of Canada’s decision to raise interest rates followed a similar move by the Reserve Bank of Australia, which in part led to a rise in U.S. Treasury yields and a rout in technology stocks, with the Nasdaq hitting its highest level since April 25, according to FactSet. maximum drop.
While small-cap stocks held firm amid the turmoil, the reaction has raised concerns that a similar scenario might be in store when the Federal Reserve makes its latest interest rate decision on Wednesday.
Consequences of “pausing rate hikes but not giving up on austerity”
There might be more turmoil in stocks if the Fed signals that it plans to surprise the central banks of Canada and Australia with tightening measures. Such an effect would not necessarily require a rate hike, market strategists said.
There are signs of complacency in U.S. stock markets that might complicate their response. Matt Maley, chief market strategist at Miller Tabak + Co., said the Cboe Volatility Index fell back below 15 for the first time since before the start of the coronavirus pandemic, a sign investors weren’t worried enough regarding a potential sell-off.
Another analyst compared the potential fallout from Fed tightening to bad times in 2022.
“If the Fed signals that it’s going to raise rates once more, then the market game may look more like 2022 than it has been so far in 2023,” Will Rhind, founder and chief executive of GraniteShares, said in a phone interview with MarketWatch.
Perhaps the biggest uncertainty will be Tuesday’s inflation report. If inflation picks up, Powell and his colleagues might come under pressure to raise rates without first inoculating markets.
For that reason, Rhind believes investors are underestimating the chances of a rate hike this week, even though fed funds futures are pricing in regarding a 70 percent chance of the Fed staying on hold, according to CME Group’s FedWatch tool.
Rhind is not alone in thinking this way. Leslie Falconio, chief investment officer at UBS Global Wealth Management, said Tuesday’s inflation report might be a determining factor for markets. He summed up concerns expressed elsewhere on Wall Street in a recent note to clients.
“We believe that another rate hike is under consideration, and the CPI data released on June 13, the day before the Fed’s decision is announced, will be the decisive factor. We believe that another rate hike will not have a material impact on economic growth, said Falconio.
What should investors be wary of?
Assuming the Fed does pause in rate hikes in June, there are some key pieces of information that investors should be keeping an eye on to determine whether the Fed has entered a “paused rate hikes but not abandoned tightening” state.
Perhaps most important is how the Fed will handle the closely watched “dot plot” adjustments. Patrick Saner, head of macro strategy at the Swiss Re Institute, said that if the dot plot moves up slightly, it will send a clear and unmistakable signal to the market that the Fed will continue to tighten monetary policy, which may not be good for the market.
“If the Fed doesn’t raise interest rates in June but wants to avoid giving the market the impression that the rate hike cycle is complete, you need to make adjustments to the dot plot, and as a basis for the adjustment, the Fed will A stronger GDP forecast and a higher inflation forecast might be released. So I think the dot plot and the statement will be the focus.”
Beyond that, whatever the Fed does or says will likely be read in the context of economic data due this week. In addition to Tuesday’s inflation report, the May retail sales report will be released on Thursday and the University of Michigan’s consumer sentiment report will be released on Friday. All of these data points might affect investors’ views on the state of the U.S. economy and what they expect the Fed to do as a result of the data.
(This article is translated from MarketWatch. MarketWatch is operated by Dow Jones, the parent company of The Wall Street Journal, but MarketWatch is independent of Dow Jones Newswires and The Wall Street Journal.)
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