What’s the Fed thinking now?

Thoughts of the Day

The US Federal Reserve has been quite consistent with their message to the markets so far. They need more evidence that inflation is heading decisively towards their 2% target before they start cutting interest rates. Interest rates which are now in a restrictive zone (i.e. above the neutral rate and is helping to slow the economy) may need to stay high for longer if the economy remains resilient while inflation remains sticky.
Their preferred measure of inflation, the Personal Consumption Expenditure Index, which will be released on Friday is expected to show that prices rose +2.7% year-on-year, as it did last month. Since the Fed officials which will be under their media blackout period (Federal Reserve policy limits the extent to which FOMC participants and staff can speak publicly or grant interviews during Federal Reserve blackout periods, which begin the second Saturday preceding a Federal Open Market Committee, FOMC, meeting and end the Thursday following a meeting) from 1 June to 13 June and the next policy meeting is on 12 June, we have limited opportunities to hear from the officials after the PCE announcement on Friday, 31 May. 
The interest rate futures market is pricing a 99% probability that the Fed will be keeping interest rates unchanged for the June meeting. So what’s important would be the tone about future policy path after seeing the latest inflation data.
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Tradertainment

Day Ahead

Germany CPI (+2.4% YoY expected vs +2.2% prev)
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What Happened Yesterday

Market Movements as of New York Close 28 May 24
  • Canadian Producer Price Index (PPI) : Producer Prices rose +1.5% Month-on-month (vs + 0.8% expected and +0.9% prev [revised from +0.8%]) and  +1.4% Year-on-Year (vs -0.4% prev [revised from -0.5%]). Market reaction to the data was muted despite the upside surprise.
  • Australian Monthly Consumer Price Index (CPI) rose +3.6% YoY (vs +3.4% expected and +3.5% prev). The AUDUSD rose +0.22% to 0.6666 from 0.6651 in immediate reaction.
  • Due to poor results from the 2-year and 5-year treasury note auctions, the 10-year US bond yield rose +0.09%. $70 billion of five-year notes were sold by the US at 4.553%, slightly above the pre-auction level of 4.540%. 
  • The US stock market opened slightly higher from Friday. It then traded within a narrow range through the New York session. The S&P 500 finished just +0.02% higher (high: +0.21%, low: -0.45%), the Dow Jones slipped -0.55% (high: -0.10%, low: -0.93%) while the Nasdaq rose +0.32%  (high: +0.36%, low: -0.28%).
  • The crypto market weakened slightly in early Asian hours yesterday as $9 billion worth of BTC from wallets belonging to Mt. Gox (defunct Bitcoin exchange closed in 2014 which lost hundreds of thousands of bitcoin in a hack. Those bitcoins were recovered by international law enforcement and will be refunded to users) were transferred to an unknown address. Bitcoin fell to a low of 67,238 (-3.1%) but recoup some of the losses slowly through the rest of the day and ended just down -1.5%.
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Headlines & Market Impact

AI darling Nvidia’s market value surges closer to Apple

Notable Snippet: Last trading at $1,128, Nvidia’s market capitalization reached $2.8 trillion, compared to a market value of $2.9 trillion for Apple, which is Wall Street’s second-most valuable company after Microsoft.

Its stock surged as much as 8% to $1,149.39 during the session, an intraday record high. Apple’s stock was down 0.2% in afternoon trading.

Nvidia’s shares have surged nearly 13% since it forecast second-quarter revenue above Wall Street expectations last week and announced a stock split, which excited investors as they continue to bet on the AI poster child.

“The market has been struggling to keep up with the company’s ever improving growth trajectory. At a mid-thirties forward earnings multiple, this still doesn’t feel like bubble territory,” said Derren Nathan, head of equity analysis at Hargreaves Lansdown.

Nvidia recently traded at 36 times its forward profit estimates, compared with 38 for Advanced Micro Devices (AMD.O) and 21 for Intel (INTC.O) according to LSEG data.

Nvidia, which has been one of the biggest beneficiaries of the AI boom, reported a five-fold jump in revenue at its data centre segment last week as customers lined up for their high-performance chips.

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BOJ’s underlying inflation measures in April all fall below 2%

Notable Snippet: The Bank of Japan’s key measurements of underlying inflation in April all fell below its 2% target for the first time since August 2022, data showed on Tuesday, heightening uncertainty on the timing of its next interest rate hike.

The weighted median inflation rate, among the three indicators closely watched as a gauge on whether price rises are broadening, rose 1.1% in April from a year earlier after a 1.3% gain in March, the data showed.

The trimmed mean index, which excludes the upper and lower tails of the price change distribution, rose 1.8% in April from a year earlier, slowing from the previous month’s 2.2%, the data showed.

A third index that measures the inflation rate with the highest density in the distribution also rose 1.6% in April, slowing from the previous month’s 1.9% gain, it showed.

The data cast doubt on the BOJ’s view that price rises are broadening beyond those driven by rising raw material costs, and likely to be sustained backed by robust domestic demand.

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US consumer confidence recovers; inflation worries persist

Notable Snippet: The mixed survey from the Conference Board on Tuesday also showed more consumers believed that the economy could slip into recession in the next 12 months. Nonetheless, consumers were very upbeat about the stock market and more planned to buy major household appliances over the next six months.

While the economy is expected to slow this year as a result of the cumulative impact of 525 basis points worth of interest rate hikes from the Federal Reserve since March 2022 to tame inflation, economists and most business executives are not forecasting a downturn.

The Conference Board said that its consumer confidence index increased to 102.0 this month from an upwardly revised 97.5 in April. Economists polled by Reuters had forecast the index slipping to 95.9 from the previously reported 97.0. It outperformed the University of Michigan’s sentiment index.

Confidence remains within the relatively narrow range it has been hovering in for more than two years.

The improvement was across all age groups, with consumers making annual incomes over $100,000 posting the largest increase in confidence. On a six-month moving average basis, confidence remained highest among the under-35 age cohort and those with annual incomes of more than $100,000.

Consumers’ perceptions of the labour market also improved, with the survey’s so-called labour market differential, derived from data on respondents’ views on whether jobs are plentiful or hard to get, widening to 24 from 22.9 in April, though opportunities are probably not as abundant as in the past year.

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Best,
Phan Vee Leung
CIO & Founder, TrackRecord