What’s New from the Fed?

Thoughts of the Day

The US Federal Reserve kept rates unchanged, cut balance sheet reduction to $25 billion/month from $60 billion. Powell avoided hawkish tones, stressing a balanced approach to employment and inflation. They remain data-dependent, still foresee cuts at some point.

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What Happened Yesterday

Market Movements as of New York Close 1 May 24

US ADP Employment Change (192K actual vs +179k expected and +208k prev – revised from +184k). US JOLTS Job Openings (8.488M actual vs 8.68M expected and  8.831 prev – revised from 8.756M). Market impact was limited ahead of the US Federal Reserve policy meeting.

Federal Reserve meeting: The Federal Reserve kept interest rates unchanged at 5.25%-5.50% as it noted the lack of progress towards the 2% inflation target. Additionally, it noted that the economy continues to expand at a solid pace with low unemployment and strong job gains. However, it announced that it will reduce the monthly balance sheet reduction from $60 billion to $25 billion in June.

Fed Chair Powell Conference: Restrictive monetary policy needs more time to do its job. How long that will take, how patient we need to be, will depend on data. “My expectation is over the course of this year, inflation will move back down but my confidence in that is lower than it was before.” If inflation proves more persistent and the labour market remains strong, then it could be appropriate to hold off on rate cuts. Unlikely that next policy rate move would be a hike. Gaining greater confidence on inflation moving toward 2% will take longer than expected. Further progress on inflation is not assured.

Towards the end of the NY trading hours, the Japanese MoF was suspected to have intervened to sell USDJPY from above 157.00 to hit a low of 153. (see more details below)

The US 2-year bond yield fell -0.08% to 4.96% while the 10-year yield fell -0.06% to 4.63% resulting in the US Treasury Yield curve inversion narrowing to 0.33%. 

The US stock futures traded within a narrow range during the Asian and London trading session as the Federal Reserve meeting loomed in the New York session. The S&P 500 futures was up merely +0.16% when the New York session began.

The US stock market was pretty tame ahead of the US Federal Reserve meeting. It then saw a sudden spike (S&P 500: +1.43%, Dow Jones: +1.08%, Nasdaq: +1.82%) following the decision to keep rates as it is and to reduce the balance sheet runoff. The spike was then quickly reversed after Fed Chair Powell’s press conference ended which noted that progress towards the 2% target is taking longer than expected. The S&P 500 finished -0.33% lower on the day (high: +1.20%, low: -0.44%), the Dow Jones rose +0.23% (high: +1.41%, low: -0.09%) while the Nasdaq decreased -0.70% (high: +1.30%, low: -0.90%).

[Earnings] Qualcomm (NASDAQ: QCOM, +4.11% in after market trading) provided better than expected revenue forecast as it called out strong demand for “AI-powered” smartphones. Revenue:  $9.39 billion vs $9.34 billion expected. Earnings: $2.44 vs $2.32 expected.

Despite having a similar spike during the New York session in the crypto market, the crypto market finished the day lower due to weakened risk sentiment as well. Bitcoin fell -3.65% (intraday highs: +0.3%, intraday lows: -3.3%) while Ether fell -1.45% (intraday highs: +0.3% intraday lows: -6.5%).
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Headlines & Market Impact

Yen surges on suspected intervention by Japanese authorities

Notable Snippet: The yen surged against the dollar in early Asian hours on Thursday on what traders suspected was another round of intervention by Japanese authorities to stop a sharp slide in the currency.

The dollar fell sharply to precisely 153 yen from about 157.55 yen for reasons that were not immediately clear , but traders and analysts were quick to say it was dollar selling ordered by Japan’s Ministry of Finance to support a currency languishing at 34-year lows.

“There’s no doubt the MOF intervened,” said Daisaku Ueno, chief FX strategist at Mitsubishi UFJ Morgan Stanley Securities, who says officials have set 160 yen per dollar as their “final defense line.”

“This morning’s intervention is proof that Japanese authorities will intervene any time of the day, and any day of the year,” he added. “They will continue to intervene.”

That milestone also triggered a sharp rebound in the yen, which official data earlier this week suggested was due to Japanese intervention totalling about $35 billion, close to a record amount. The finance ministry has declined to say whether or not it was behind the move.

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Fed leaves rates unchanged, flags ‘lack of further progress’ on inflation

Notable Snippet: The U.S. Federal Reserve held interest rates steady on Wednesday and signalled it is still leaning towards eventual reductions in borrowing costs, but put a red flag on recent disappointing inflation readings that could make those rate cuts a while in coming.

Indeed, Fed Chair Jerome Powell said that after starting 2024 with three months of faster-than-expected price increases, it “will take longer than previously expected” for policymakers to become comfortable that inflation will resume the decline towards 2% that had cheered them through much of last year.

“Inflation is still too high,” Powell said in a press conference after the end of the Federal Open Market Committee’s two-day policy meeting. “Further progress in bringing it down is not assured and the path forward is uncertain.”

Powell said his forecast remained for inflation to fall over the course of the year, but that “my confidence in that is lower than it was.”

Whether there are rate cuts this year or not remains in doubt.

“If we did have a path where inflation proves more persistent than expected, and where the labour market remains strong but inflation is moving sideways and we’re not gaining greater confidence, well, that would be a case in which it could be appropriate to hold off on rate cuts,” Powell said. “There are paths to not cutting and there are paths to cutting. It’s really going to depend on the data.”

The U.S. central bank also announced it will scale back the pace at which it is shrinking its balance sheet starting on June 1, allowing only $25 billion in Treasury bonds to run off each month versus the current $60 billion. Mortgage-backed securities will continue to run off by up to $35 billion monthly.

The step is meant to ensure the financial system does not run short of reserves, as happened in 2019 during the Fed’s last round of “quantitative tightening.”

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US fast-food chains may have to amp up promotions as more people eat at home

Notable Snippet: Global fast food giants may have to dole out steeper promotions to lure inflation-hit customers who are increasingly opting to eat at home, following weak sales from the likes of McDonald’s and Starbucks this week.

Disposable income in the United States is declining, particularly in the lower-income cohort, while the slow economic recovery in China has increased industry-wide pressures for quick-service chains including KFC owner Yum Brands (YUM.N) that has extended across several quarters.

Menu prices have risen across the industry over the past year as companies try to mitigate higher commodity and supply chain costs. However, that has hurt demand and boosted consumers’ desire to eat at home in the United States, the world’s largest economy.

Packaged food companies are also feeling the pinch of weak consumer spending, especially from low-income households, as their cookies and baked snacks see a slowdown in sales.

“Ongoing softness in U.S. biscuits is driven primarily by brands that had higher penetration among lower-income households such as Chips Ahoy!,” Mondelez (MDLZ.O) CFO Luca Zaramella said.

Meanwhile, Kraft Heinz CEO Carlos Abrams-Rivera on Wednesday noted “a clear pullback of restaurant spend by these lower-earning households, especially in restaurants and convenience stores.”

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Phan Vee Leung
CIO & Founder, TrackRecord