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Forex Market Analysis: USD & US Equities Post-FOMC Insight

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CURRENCIES

USD and US Equities Post-FOMC Analysis

• Fed trims rate cut expectations due to higher inflation forecasts.
• USD regains some strength on hawkish projections.
• US equities rally on lower yields and USD despite inflation concerns.

Fed’s Decision on Rate Cuts

• Rate Cut Adjustments:
  • After May’s inflation data, the Fed revised its interest rate outlook, reducing expected rate cuts for 2024 from three to one 25 basis point cut.
  • This change was driven by persistent inflation, leading the Fed to adopt a more conservative approach, maintaining current restrictive interest rates.
• Economic Projections:
  • Growth and unemployment forecasts for this year remained unchanged.
  • Labour market expected to ease slightly by the end of 2025.
  • Headline and core PCE data projected to rise this year and next, with a firmer Fed funds rate anticipated over the same period.

USD Performance on Hawkish Forecasts

• USD Recovery:
  • Hawkish forecasts helped the dollar recover some losses from earlier softer CPI data.
  • Dollar continues its bullish momentum, but upcoming PPI data could influence its trajectory.
• Market Reactions:
  • Markets considered a second rate cut after the CPI print, but Fed projections cast doubt on this.
  • Dollar strength is supported by a weaker euro, affected by political developments in France.

STOCK MARKET

Market Overview

• US inflation cooled in May, as per the Bureau of Labor Statistics.
• Consumer Price Index (CPI) remained flat month-over-month and rose 3.3% annually, both measures below expectations and lower than April’s increases.

Details of the CPI Report

• Headline Inflation:
  • Monthly CPI increase: 0.0%, lowest since July 2022.
  • Annual CPI increase: 3.3%, down from April’s 3.4%.
  • Decline driven by falling energy prices, especially gas.
• Core Inflation:
  • Monthly core CPI increase (excluding food and gas): 0.2%, lowest since June 2023.
  • Annual core CPI increase: 3.4%, lower than April’s 3.6%.
  • Shelter costs remained a significant factor in core inflation, rising 0.4% month-over-month.

Market Reactions

• Treasury Yields and Equities:
  • 10-year Treasury yield dropped by 12 basis points to around 4.29%.
  • Stock markets rose: NASDAQ (+1.53%), S&P 500 (+0.85%), Dow Jones (-0.09%).
• Fed’s Perspective:
  • The CPI data provided a positive outlook for the Federal Reserve ahead of its policy decision.
  • Despite the easing inflation, the Fed maintained a “bumpy” path to its 2% target.

Economic Indicators and Projections

• Labor Market:
  • Added 272,000 nonfarm payroll jobs in May, surpassing the 180,000 expectation.
  • Wages rose 4.1%, with the unemployment rate slightly increasing to 4%.
• Preferred Inflation Gauge:
  • Core PCE price index remained steady at 2.8% year-over-year for April.
• Rate Cut Expectations:
  • Investors anticipate one to two 25-basis-point cuts in 2024, down from six cuts earlier projected.
  • CME FedWatch Tool indicates a 69% chance of rate cuts starting in September, up from 53% the day before.

Specific Index Movements

• Shelter and Rent:
  • Shelter index rose 5.4% annually, 0.4% monthly.
  • Rent and owners’ equivalent rent each increased by 0.4% monthly.
  • Lodging away from home decreased slightly.
• Energy:
  • Energy prices fell 2% monthly, up 3.7% annually.
  • Gas prices dropped 3.6% from April to May.
• Food:
  • Food index rose 2.1% annually, 0.1% monthly.
  • Food at home was flat, food away from home rose 0.4%.
• Other Indexes:
  • Increases: Medical care, used cars and trucks, education.
  • Decreases: Airline fares, new vehicles, communication, recreation, apparel.

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