SUMMARY OF FED CHAIR POWELL'S COMMENTS (5/14/24):
1. "Overall a good picture looking at US economic data" 2. Inflation was notable in Q1 for the lack of further progress 3. Housing inflation has been a bit of a puzzle for the Fed 4. Restrictive policy may take longer than expected to lower inflation 5. Unlikely the Fed's next move will be an interest rate hike 6. "Credibility is everything for central banks" Source: The Kobeissi Letter
Markets are currently anticipating the first Fed cut in September and a potential second cut in December.
This week's US inflation data could shift these expectations backward or forward depending on how the data comes in. Source: Markets & Mayhem
Bank of England declares independence from the US Fed ->
BoE's Bailey pushed back against a slower rate cutting cycle for the UK: “Quite a lot of the market movements of late appear to have been US-originated. Inflation dynamics here are different to inflation dynamics in the US. (It’s a) very different sort of situation in terms of our economies.” Percentage odds of a June cut were similar for the BOE and Fed at the start of the quarter, but now the market sees a wide gap. Source: Jeffrey Kleintop, Bloomberg
Charted: 30 Years of Central Bank Gold Demand
by Elements / Visual Capitalist
JUST IN 🚨: Treasury Secretary Janet Yellen says the Bank of Japan BoJ should consult with her before intervening to support Japanese Yen
Source: Barchart
Odds of a September 2024 rate cut jump to 53% after the weaker than expected jobs report, according to Kalshi.
The base case now shows TWO interest rate cuts in 2024, up from ONE prior to the report. On Wednesday, Fed Chair Powell specifically said weakening of the labor market could spur rate cuts. Market implied odds of zero interest rate cuts this year have dropped from 35% to 27%. The Fed rollercoaster ride continues. Source: The Kobeissi Letter
'Higher for Longer' — The Fed Fund Future Market Takes Heed!
The market has notably adjusted its expectations for the Federal Reserve's monetary policy over the coming years. Initially, an aggressive trajectory toward a terminal rate of around 3% was projected at the start of the year, indicating a return to a Neutral rate adjusted for inflation. However, current forecasts now suggest a more cautious normalization, with a significantly higher terminal rate of 4%. Intriguingly, the market anticipates further tightening by mid-2026, which some analysts believe could echo the inflation resurgence patterns of the 1970s. The Neutral rate (R*), long considered to be around 0.5%, is now hotly debated and estimated to be between 1.5% and 2.0% in the United States. The Fed Funds Futures market appears to have already factored in the impacts of enduring fiscal deficits, improved productivity, and deglobalization trends. How will these elements continue to influence Fed policy amid shifting global economic dynamics? Source: Bloomberg
Fed's Powell: Very pleased we haven't seen pain originally projected.
The chart below summarizes it well: despite rates hikes and rates staying higher for longer financial conditions kept easing Source: Bloomberg, HolgerZ
